Coal Sector

R E P O R T O N C O M P E T I T I V E N E S S I N T H E C O A L S EC TO R
02nd February, 2012
Prepared for THE MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA through The Indian Institute of Corporate Affairs and CUTS Institute for Regulation and Competition
BY
Aequitas Legal
408 Lingapur House, Himayat Nagar, Hyderabad 500029 Tel: (91) (40) 40268507 Email: aequitas@aequitas-legal.com
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INDEX OF CONTENTS Chapter/Para No. Preliminary Abbreviations Executive Summary Chapter I Chapter II 2.1 2.2 2.3 2.3.1 2.3.2 2.3.3 2.3.4 Chapter III 3.1 3.3 3.4 3.5 3.5.1 Introduction Overview of the Coal Sector History Types and Uses of coal Size of the Coal Market Coal Reserves Demand Supply Imports Regulatory Overview Major legislations, Policies, Practices Constitutional Scheme Overview of the major legislation that have or are likely to have an adverse effect on competition Mines and Minerals (Development & Regulation) Act 1957, Amendment Act 2010, Amendment Bill 2011, and Mineral Concession Rules 1960 Coal Mines (Nationalization) Act 1973, Notifications, Amendment Bill 2000 The Coal-Bearing Areas (Acquisition and Development) Act, 1957 Colliery Control Order 2000 and the Colliery Control Rules 2004 Land Acquisition Act 1894 Environment related Legislation Import Policy New Coal Distribution Policy, 2007 Pricing Competition Issues Analysis & Recommendations Inadequate data and lack of accessible data on extractable coal reserves Prohibition on private sector participation in Coal Contents Page i ii iii iv v xvii 12 36 3 3 34 34 45 56 6 7 26 78 8 8 28 8 11
3.5.2 3.5.3 3.5.4 3.5.5 3.5.6 3.5.7 3.5.8 3.5.9 3.6 Chapter IV 4.2 4.3
11 13 13 14 14 15 15 16 16 19 20 20 21 21 23 23 28 29 37 29 30 31
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4.4 4.5 4.6 4.7 4.8 4.9 4.10
reconnaissance, prospecting or mining Allotment of coal blocks, surface rights and mining clearances Changing environmental policies Incumbency benefits enjoyed by CIL Price Distortions Impediments on Captive Mining Bottlenecks for import of coal Lack of adequate coordination between ministries and agencies administering the different statutes governing the coal sector at the Central and State Level & Absence of a sectoral regulator Conclusions & Agenda for Competition Policy Advocacy Select Bibliography
31 32 32 32 34 34 35 35 36 36 36 38
Chapter V
39 44
45 46 50
Annexure A
Other coal related legislation reviewed that does not appear to have any adverse effect on competition
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PRELIMINARY
1.1
The Ministry of Corporate Affairs, Government of India, vide notification F.No.5/15/2005-IGC/CS dated 8th June 2011, constituted a committee, namely the Committee on National Competition Policy and Related Matters (C-NCP), for the purposes of: (a) Framing of a National Competition Policy (NCP) (b) Strategy for competition advocacy with government and private sector (c) Changes required in Competition Act for fine tuning it and (d) Any other matter relation to competition issues The Committee has submitted its draft report on Competition Policy and will shortly be submitting a report on the Competition Advocacy Strategy and the proposed changes in the Competition Act, 2002. In order to develop a strategy for competition advocacy with the Government and the private sector, the Committee seeks to have specific inputs and undertake evidencebased advocacy, for which, a review of distortive provisions in policies, laws, regulations, practices etc is required. The sector research studies aim to provide illustrative examples of those laws, regulations and policies which either exert or have the potential to exert anti-competitive effects on those sectors. The studies are to be managed by the Indian Institute for Corporate Affairs. CUTS Institute for Regulation and Competition (CIRC) is assisting IICA in this project through specific activities. Aequitas Legal (we, us, or our) has prepared this report for the Ministry of Corporate Affairs at the request of CIRC. The terms of reference require a review of legislation and policies in the coal sector in India in order to highlight those policies and provision that affect competition and competitiveness in the sector, and recommending changes that would promote and protect competition in the concerned sector while balancing the social objectives sought to be achieved. The timeline for this exercise was thirty days starting September 15, 2011. Towards this end, we have reviewed the various legislations, Acts, Rules, Regulations, Notifications, as well as Ministry guidelines, memorandums, and practices, that operate on the coal sector in India, as well as reviewed relevant sector specific studies and reports prepared by expert committees and research institutes. Given the short time frame within which this Report was to be prepared, we have concentrated on the major provisions and practices that have a material bearing on the competitiveness in the coal sector, and a preliminary analysis of the issues and recommendations based on the literature survey, have been provided. A detailed review may be needed to further identify and analyse the effects of practices that
1.2
1.3
1.4
1.5
1.6
1.7
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impede, or may impede, competition in specific areas relating to the production, distribution, and sale of coal. 1.8 This report has been prepared on the basis of the examination of documents publicly available. This report is strictly limited to the matters stated in it and does not extend, and is not to be read as extending by implication, to any other matter. Without limiting the generality of this statement and save as otherwise expressly indicated, this report does not advise on, nor should it be construed as an assessment of conduct, agreements, or practices by any of the entities referred to in the report. This report should not be regarded as forming a legal opinion concerning any matter referred to in it.
1.9
1.10 We would like to thank the Ministry of Corporate Affairs, the Indian Institute of Corporate Affairs, and the CUTS Institute for Regulation and Competition for the opportunity to prepare this Report.
Adithya Krishna Chintapanti
Abdullah Hussain
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ABBREVIATIONS
In this report certain frequently used words or expressions that may appear, have, for convenience and clarity, been given the following meanings which apply generally throughout this document unless the contrary is clearly stated:
Dates CEPI Chapter CIL CMPDIL Contract Labour Act CPP FSA FSTA FY GCV IEP INR or Rs. IPP Kcal Kg Ltd. MCA MoC MoEF MoP MoST MT p.a. Pvt. RBI ROC Rs. or INR
Dates are in the date/month/year format. Thus for example, 09.03.2011 would mean 9th March 2011. Comprehensive Environment Pollution Index refers to a Chapter in the various Parts of this Report Coal India Limited Central Mine Planning & Design Institute Ltd., Contract Labour (Regulation and Abolition) Act, 1970 Captive Power Plant Fuel Supply Agreement Fuel Supply and Transport Agreement Financial Year (beginning 1st April and ending 31st March) Gross Calorific Value Integrated Energy Policy Report of Expert Committee, August 2006 Indian Rupees Independent Power Producer Kilo Calories Kilograms Limited Ministry of Corporate Affairs Ministry of Coal Ministry of Environment and Forests Ministry of Power Ministry of Surface Transport Million Tonnes Per Annum Private Reserve Bank of India Registrar of Companies Indian Rupees
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SCCL Shankar Report TERI TOR U/s or u/s UHV w.e.f. w.r.t. Committee
Singareni Collieries Company Ltd. Report of the Expert Committee on Road Map for Coal Sector Reforms Part I, December 2005 or Part II, October 2007
The Energy and Resources Institute Terms of Reference

Under Section Useful Heat Value with effect from with respect to
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EXECUTIVE SUMMARY
Coal remains the primary source of fuel in India, at least for the next few decades, contributing to over 50 per cent of Indias power supply generated from coal based power plants. However, the industry is monopolized by a single producer due to the operation of the Coal Mines Nationalization Act of 1973. Although a bill was introduced in Parliament in 2000 to amend the Act in order to allow private participants in the field on coal mining and production, the bill has failed to garner the necessary support required to see it through. Other major legislation affecting coal mining and production are the Mines and Minerals (Development and Regulation) Act, land acquisition laws, and environment related legislation. The policies and practices of the Ministry of Coal and Ministry of Power also have a direct bearing on the production chain, priority of sales, price, etc. In the absence of legislative amendments required to induct competition, the sector is vulnerable to the ill effects in the absence of competition, viz. lack of quality technology and production methods, lack of transparency in coal block allocations, falling production, price increases etc. Within the last three years there have been three price increases notified by Coal India Ltd. (the most recent on the 1st of January 2012, resulting from a re-categorization of coal on the GCV method) resulting in domestic prices virtually levelling with import prices. Production on the other hand has remained largely stagnant compared to the last fiscal. The upshot of these figures shows a projected gap of approximately 200 MT of coal by the end of the 12th Five Year Plan. The primary findings of this report along with the source legislation, policy, or practice, have been tabulated and included in the following table. These include measures that have recently been taken to promote competition in the sector whilst enhancing production as well as those steps that may be taken to pending passage of the Coal Mines Nationalization (Amendment) Bill of 2000:
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No.
Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry
Text of the Provision (section/clause) Or Sectoral Practice / Feature
Checklist Code from Annexure 3 of the TOR & Analysis of the Anticompetitive Effect or Market Distortion
Recommendation/s
1.
The Coal Mines Sec.3. Acquisition of rights of owners in (Nationalisation) Act, respect of coal mines 1973 (3)On and from the commencement of Ministry of Coal section 3 of the Coal Mines (Nationalisation) Amendment Act, 1976 (67 of 1976)(a) no person, other than--
A1 Grants exclusive rights to a supplier (Ministry of Coal / CIL / SCCL) to provide goods or services (i.e. mining, production, and sale of coal).
Pending the passing of the Coal Mines (Nationalisation) Amendment Bill, 2000, other avenues permitted under existing legislation need to be resorted to so as to increase the number of players in the sector. The same include
A3 Encourage mining by State Limits (statutorily) the number of Government public sector (i) the Central Government or a firms permitted to enter the companies; Government, company or a corporation market. Increase captive user industries; owned, managed or controlled by the Captive users must be allowed to Central Government, or sell incidental coal surpluses; Group captive mines must be B3 (ii) a person to whom a sub-lease, allowed for small end users; referred to in the proviso to clause (c), Only state-owned enterprises Those allotted captive blocks has been granted by any such must work the block within a operate in the market. They Government, company or corporation, receive benefits or preferential stipulated period of time failing or which the allotment either stands treatment not available to other cancelled or a penalty is imposed. firms which have the effect of (iii) a company engaged inlimiting competition in the coal sector. (1) the production of iron and steel,
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No.
Recommendation/s
(2) generation of power, (3) washing of coal obtained from a mine, or (4) such other end use as the Central Government may, by notification, specify
The present legal regime reduces the incentive of suppliers to compete. Coal companies have been slow in adopting new techniques or increasing the size of (b) excepting the mining leases granted equipment, the companies to before such commencement in favour of adopt modern technology to the Government, company or increase productivity. corporation, referred to in clause (a), and any sublease granted by any such Government, company or corporation, all other mining leases and sub-leases in force immediately before such commencement, shall, in so far as they relate to the winning or mining of coal, stand terminated; (c) no lease for winning or mining coal shall be granted in favour of any person other than the Government, company or corporation, referred to in clause (a):
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No.
Recommendation/s
Provided that the Government, company or corporation to whom a lease for winning or mining coal has been granted may grant a sub-lease to any person in any area on such terms and conditions as may be specified in the instrument granting the sub-lease, if the Government, company or corporation is satisfied that(i) the reserves of coal in the area are in isolated small pockets or are not sufficient for scientific and economical development in a co-ordinated and integrated manner, and (ii) the coal produced by the sub-lessee will not be required to be transported by rail. 2. The Coal-Bearing Areas (Acquisition and Development) Act, 1957 Ministry of Coal Sec. 11. Power of Central Government to direct vesting of land or rights in a Government company. (1)Notwithstanding anything contained in section 10, the Central Government may, if it is satisfied that a Government B3 The said provision must be amended to extend the vesting of the land State-owned enterprise/s operate acquired in pursuance of the in the market/s being assessed and enactment to private players as well. receive benefit/s and preferential treatment not available to other
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No.
Recommendation/s
company is willing to comply, or has firms. complied, with such terms and conditions as the Central Government may think fit to impose, direct, by order in writing, that the land or the rights in or over the land, as the case may be, shall, instead of vesting in the Central Government under section 10 or continuing to so vest, vest in the Government company either on the date of publication of the declaration or on such other date as may be specified in the direction. (2)Where the rights under any mining lease acquired under this Act vest in a Government company under sub-section (1), the Government company shall, on and from the date of such vesting, be deemed to have become the lessee of the State Government as if a mining lease under the Mineral Concession Rules had been granted by the State Government to the Government company, the period
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No.
Recommendation/s
thereof being the entire period for which such a lease could have been granted by the State Government under those rules; and all the rights and liabilities of the Central Government in relation to the lease or the land covered by it shall, on and from the date of such vesting, be deemed to have become the rights and liabilities of the Government company. 3. Mines and Minerals Sec. 11A. Procedure in Respect of Coal Development and and Lignite. Regulation Act, 1957. The Central Government may, for the Ministry of Mines purpose of granting reconnaissance permit, prospecting license or mining lease in respect of an area containing coal or lignite, select through auction by competitive bidding on such terms and conditions as may be prescribed, a company engaged in,(i) (ii) production of iron and steel; generation of power; A1 , A4 , D2 Reinforces the exclusive rights granted to government companies to provide coal by restricting private player participation in the grant of reconnaissance permit, prospecting license or mining lease to sectors where captive mining is allowed. Moreover, the section is silent on the kind of coal blocks that will be put up for auction and the Government is empowered to reserve coal blocks for government This provision mirrors the captive mining related provision of the Coal Mines (Nationalisation) Act, 1973 [Sec 3.(a)(iii)]. It is opined that the same would have to be amended after the proposed Amendment Bill of 2000 is given effect to by the Union Parliament. The amendment is a salutary step as it seeks to grant coal blocks impartially and transparently on the basis of auctions. Further, participating firms are likely to
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No.
Recommendation/s
(iii)
washing of coal obtained from a mine; or (iv) such other end use as the Central Government may, by notification in the Official Gazette, specify, and the State Government shall grant such reconnaissance permit, prospecting license or mining lease in respect of coal or lignite to such company as selected through auction by competitive bidding under this Action : Provided that the auction by competitive bidding shall not be applicable to an area containing coal or lignite ,(a) where such area is considered for allocation to a Government company or a Corporation for mining or such other specified end use; (b) where such area is considered for allocation to a company or
companies. This again results in CIL and SCCL being allocated prime coal blocks while private companies have to participate in an auction. With respect to the Mines and Minerals Bill 2011, proposed Clause 4(2) exempts government companies from the requirement of obtaining a reconnaissance or prospecting licence. This grants an unfair advantage to companies competing in the market, i.e. CIL through CMPDIL, and Singareni Collieries Ltd.
develop the block won in the auction as soon as possible and not delay progress has been the case with the many coal blocks allocated to the private sector. However, the provision may be amended to include public sector companies in the bidding process, i.e. remove the power of the Government to reserve coal blocks for allocation to CIL and its subsidiaries. The pro-competitive implementation of the provision would also depend of the scheme of auction, which is presently being formulated by the Ministry.
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No.
Recommendation/s
corporation that has been awarded a power project on the basis of competitive bids for tariff (including Ultra Mega Power Projects) . Explanation .- For the purposes of this section , Company means a company as defined in Section 3 of the Companies Act, 1956 (1 of 1956) and includes a foreign company within the meaning of Section 591 of that Act. 4. Colliery Control Rules , 2004 framed under the Mines and Minerals (Development and Regulation) Act, 1957. Ministry of Mines Rule 3. Categorisation of Coal The Central Government may by notification in the Official Gazette, prescribe the classes, grades and sizes into which coal may be categorised and the specifications for each such class, grade or size of coal. Issues emanating from A1 Following earlier expert committee recommendations, the Central Government recently decided to switch from the UHV system of grading coal to the GCV method. This has resulted in coal being classified into 17 bands and raising their corresponding prices significantly, with the cement sector being the most affected. Although a laudable step in terms of bringing the price of coal nearer to landed price levels in view of the fact that CIL is the monopoly supplier, it is essential that the price of coal be regulated until the passage of the Coal Mines (Nationalisation) Amendment Bill 2000.
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No.
Recommendation/s
5.
Sectoral Issue
Inadequate data and inaccessibility of A4 All the data related to coal retained data on extractable coal reserves for Limits the ability of some types of by CMPDIL should be kept in the private players. suppliers to provide a good or public domain and only such data service which is relevant for the work of CIL must be retained. D2 Firms in the market suffer from the In those areas not covered by unequal application of laws or Proven Reserves with Geological regulations. Reports the private sector must be invited participate in exploration and mine development at their risk partly shared with the government on the lines of New Exploration Licensing Policy (NELP) followed in the oil sector. At present detailed coal exploration is done exclusively by CMPDIL which is a subsidiary of CIL. CMPDIL must be made an autonomous organisation.
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No.
Recommendation/s
6.
Sectoral Issue
The various advantages granted to CIL due to nationalization in 1973 and the incumbency benefits enjoyed by CIL over the last 35 odd years.
B3 Measures must be taken to ensure State-owned enterprise(s) that CIL does not exploit its receiving benefits and preferential dominant position. treatment not available to other firms which appear to have the effect of limiting competition in the relevant market. Legal measures should be evolved to cancel the licenses issued earlier if the allottee has not taken adequate steps to bring the allotted mines to production or in setting up end use units.
7.
Sectoral Issue Ministry of Coal
Non Working of Coal Blocks and Mining B3 Licenses by CIL does not invite State-owned enterprise(s) cancellation. receiving any benefit(s) or preferential treatment not available to other firms which appear to have the effect of limiting competition in the relevant market. Price Distortions
8.
Sectoral Issue Ministry of Coal
B1 CILs pricing decisions are influenced Limits sellers ability to set the by Government policies. Eg. prices for goods or services. Differential pricing for defence, fertilizers and power. (We are of the view that these sectors may figure in B5 the social welfare related
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No.
Recommendation/s
The under-development of transport and other infrastructure appears reinforces the monopoly status of the incumbent firms and reduces any potential competition.
exemptions enshrined in the Competition Policy. To quote from the Draft Policy , The National Competition Policy is not dogmatic and is mindful of appropriate balance in matters having bearing on social, environmental, security and other strategic issues of national importance; the only thing is that a conscious view may have to be taken but the concerned authorities in balancing the competing considerations. ) Freight rates of railways for transport of coal need to be rationalised. Alternative modes of movement of coal be promoted for ex. coastal shipping, river/canal movement, movement of coal slurry through pipeline etc.
9.
Sectoral Issue
Bottlenecks for import of coal.
B5 The
under-development
Setting up of coastal power plants of based on imported coal must be
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No.
Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry Ministry of Power Ministry of Railways Ministry of Road Transport & Highways Ministry of Shipping
Recommendation/s
transport and other infrastructure appears reinforces the monopoly status of the incumbent firms and reduces any potential competition.
encouraged through appropriate policy initiatives. Correspondingly adequate port facilities and rail linkages need to be developed as necessary infrastructure.
10. Sectoral Issue Ministry of Coal
Need for Regulatory Coordination
C1 There is a need for a new and Creates a self-regulatory or co- comprehensive governance regulatory regime structure for the coal sector including a regulatory authority. A Group of Ministers is said to be working on resolution of these issues while striking an appropriate balance between environment protection and energy security. A clear policy needs to be adopted with procedural rules that incorporate strict time lines for clearances.
11. Environment and Policies Ministry Environment Forests
Laws Regulatory delays in granting approvals D1 for coal mining. The sector subject to policies or regulations that are onerous, costly of time-consuming, and frequently & change, thereby creating policy uncertainty. The issue of delays due to time consuming environmental clearances and uncertainty over the outcome has been documented in earlier reports of expert committees. The frequent changing policies and
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No.
Recommendation/s
rules adopted in the failed experiment of the recent Go-No Go and CEPI policies have added to the uncertainty and have been blamed for the fall in production levels. While this is primarily an issue concerning the removal of bottlenecks it acts as a disincentive for other potential suppliers to enter and compete in the sector.
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CHAPTER I : INTRODUCTION
1.1
Coal is a combustible compact black or dark-brown carbonaceous sedimentary rock formed from compaction of layers of partially decomposed vegetation and occurs in stratified sedimentary deposits,1 primarily used as a solid fuel to produce electricity and heat through combustion. The other major fuel resources are oil, natural gas, and uranium.2 However coal is most widely spread and available fossil fuel around the globe. India has the fifth largest proved coal reserve in the world after the United States, Russia, China, and Australia. Coal is the primary source of supply of commercial energy in India and ranks third amongst the primary producers of coal. 3 78 per cent of Chinas However, coal has the largest domestic reserve base and the largest share of Indias energy production and consumption.4 As on June 2010, coal accounted for 82.4% of the total thermal generating capacity in India,5 representing approximately 52.4% of Indias total energy needs followed by oil and gas at 41.6 per cent. 6 In India, most utilities were, and continue to be, dominated by public sector companies. As pointed out by TERI7, in the electricity sector, government companies/corporations account for 87% in generation (With NTPC accounting for approximately 80%), 100% in transmission, 86% in distribution and retail supply and 93% in trading activity, while in the Oil & Gas sector the national oil companies together hold about 86% of Indias crude oil exploration & production, 77% of the natural gas production, 74% of oil refining capacity, and 86% of the marketing infrastructure. The coal sector is no different. Coal India Limited (CIL) accounts for approximately 80-82% of the production while Singareni Collieries Company Limited (a joint venture between the Central Government (49%) and the State of Andhra Pradesh (51%)) accounts for approximately 9.5-11.5% of Indias coal production in the 2010 fiscal.
1.2
1.3
1.4
4 5 6 7
The Geological Survey of India, Coal.http://www.portal.gsi.gov.in/portal/page? _pageid= 127,721708&_dad=portal&_schema=PORTAL, Last accessed on 01.10.2011. Report of the Expert Committee on Road Map for Coal Sector Reforms, Part I, Ministry of Coal, Government of India, December 2005, p.6 . http://www.coal.nic.in/expertreport.pdf, Last accessed on 03.10.2011. Coal India Limited, Draft Red Herring Prospectus, October 26, 2010, p. 54. http://www.sebi.gov.in/dp/coaldrhp.pdf, Last Accessed on 05.10.2011. Supra n.2, p.6. Supra n.3. Supra n.3. Competition in Indias Energy Sector, Final Report, TERI, New Delhi, June 2007, p. xix, http://www.cci.gov.in/images/media/completed/5teri_20080508111155.pdf, Last accessed on 22.09.2011.
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1.5
Since liberalization, the Government has been taking steps to increase competition in various sectors. The Competition Act was introduced in 2002 and the Government adopted a Working Report towards adoption of the National Competition Policy in 2007 which was incorporated in the 11th Five Year Plan document with the approval of the Cabinet and the National Development Council. According to the draft National Competition Policy 2011, the term competition is said to refer to a situation in a market place in which firms/entities or sellers independently strive for the patronage of buyers in order to achieve a particular business objective, such as profits, sales, market share, etc.8 Annexure III of the Draft provide an illustrative list of parameters against which an existing or proposed legislation, policy, or practice can be measured in order to assess whether it is likely to have an effect on competition. These are to examine whether the legislation, existing to proposed, or policy, or practice has, inter alia, any of the following effects: Limits on the number or range of suppliers by granting exclusive rights, establishing a license, permit or authorisation process, significantly raising cost of entry or exit, creating geographical or other barriers, etc. Limits the ability of suppliers to compete by limiting a sellers ability to set the prices for goods or services, limiting freedom to advertise or market, setting standards for product quality that provide an advantage to some suppliers over others, significantly raising costs of production for some suppliers relative to others (especially by treating incumbents differently from new entrants), etc. Reduces the incentive of suppliers to compete by limiting the ability of consumers to decide from whom they purchase and so on.
1.6
1.7
1.8
The Report seeks to identify those legislations, policies, and practices that have the above mentioned effect(s) in the coal sector in India. The Report is divided into five Chapters. This, Chapter I provides an introduction to coal, its importance in Indias energy sector, and also looks at the meaning of competition, and the parameters by which competition in the sector may be analyzed. Chapter II provides a brief overview of the coal sector in India, including a brief history, and the demand and supply situation. Chapter III provides an overview of the regulatory framework governing the sector and identifies the provisions that affect competition, while Chapter IV provides an analysis of the identified provisions and certain recommendations on possible steps that could be taken to infuse and improve the level of competition in the sector. Chapter V summarises the conclusions and the possible agenda for competition policy advocacy.
The Draft National Competition Policy 2011, Ministry of Corporate Affairs, Para http://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdf, Last accessed 01.10.2011.
2.1, on
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CHAPTER II : COAL SECTOR OVERVIEW
2.1
History
2.1.1 Prior to 1970, several hundred private participants were engaged in the mining and production of coal in India. With the objective of achieving sustainable growth in the coal sector and prevent wasteful mining, optimize resources, and improve mine standards and working conditions, all activities related to coal, including exploration, mining, production, distribution and sale, were nationalized by the Government of India in the early 1970s. Subsequently, in the context of safety, conservation and scientific development, the GoI acquired all coking coal mines on October 16, 1971 and nationalized them on May 1, 1972 vide Coking Coal Mines (Nationalization) Act 1972. The Coal Mines (Taking Over of Management) Act, 1973, extended the right of the Government of India to take over the management of the coking and non-coking coal mines in seven States including the coking coal mines taken over in 1971. This was followed by the nationalisation of all these mines on May 1 st 1973 with the enactment of the Coal Mines (Nationalisation) Act, 1973. 2.1.2 In 1972 the central government transferred the 226 coking coal mines then existing to Bharat Coking Coal Ltd., and a year later transferred the 711 non-coking coal mines then existing to the Coal Mines Authority Ltd., which later became Coal India Ltd. 9 Since the passing of the Nationalization Act of 1973, only government companies are allowed to engage in activities related to coal, save for an exemption in order to allow captive mining in certain sectors.
2.2
Types & Uses of coal
2.2.1 Coal is primarily of two types (a) coking coal, and (b) non-coking coal. Energy content and sulphur content are the most important coal characteristics that to determine the use of coal.10 Non-coking coal is typically low on sulphur content and low on calorific value11 and makes up the bulk of Indias coal reserves and production. Non-coking coal is primarily used in the power sector whereas coking coal, which is higher on calorific value, is used in the steel industry.
2.3
Size of the Indian coal market
2.3.1 Coal Reserves
10 11
Bharat Coking Coal Ltd. became, and continues to be, a subsidiary of Coal India Ltd. Coal India Limited, http://www.coalindia.in. http://www.coalindia.in/Company.aspx?tab=5, Last accessed on 03.10.2011. Supra n.3. Supra n.2.
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Exploration for coal blocks is undertaken at the first stage by the Geological Survey of India (GSI, under Ministry of Mines) to identify the availability of coal seams, geological structure, resource etc. Subsequently, a detailed exploration is carried out in potential areas identified. Such blocks are taken up for detailed drilling and geological assessment to bring the reserves into the proved category. This is normally undertaken by the Central Mine Planning & Design Institute Ltd., a subsidiary of Coal India Ltd. The geological reports of such detailed exploration form the basis of mine feasibility studies/mining plans, and updation of the National Coal Inventory. The detailed exploration is normally carried out by the company/companies that have been allotted the coal block.12 The coal resources in the country for the last three years are as follows:13 All figures in Million Tonnes as on 01.04.2009 as on 01.04.2010 105820 123470 37920 267210 109798 130654 36358 276810
as on 01.04.2008 Proved Indicated Inferred Total 101829 124216 38490 264535
2.3.2 Demand According to the Annual Plan 2010-2011 issued by the Ministry of Coal, the coal demand in India for the FY 2009-2010 was 582.25 MT while the expected demand for FY 2010-2011 was 624.78 MT and for FY 2011-2012 is expected to be 713.24 MT. The sector-wise breakup of demand is shown as follows: All figures in Million Tonnes 2010-2011 2011-2012 (Revised (Revised as per assessment) mid-term appraisal) 16.80 23.20 50.51 26.02 44.48 68.50
Sector
2009-2010 (Actual)
Coking Coal Steel/Coke Ovens & Cokeries Steel (Imports) Sub-total Coking Non-Coking coal
12
15.92 23.47 39.39
13
Annual Report 2010-2011, Ministry of 09.10.2011. Ibid.
Coal,
http://coal.nic.in/annrep1011.pdf , Last accessed on
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Power Utilities Captive Power Cement Steel DR BRK & others Sub-total coking Total Non-
380.13 38.47 20.80 22.89 88.82 542.86 582.25
405.00 40.00 25.98 28.80 85.00 584.78 624.78
473.00 47.06 33.35 28.96 62.43 644.74 713.24
It can be seen that the power sector (utilities and captive power) accounted for 71.89 % of the total demand in the country in 2009-2010. As on June 2010, coal accounted for 82.4% of the total thermal generating capacity in India,14 representing approximately 52.4% of Indias total energy needs.15
2.3.3 Supply (including imports) India is the third largest coal producer in the world.16 In FY 2009-2010, 514.50 MT of coal was produced. As mentioned above, since nationalization government companies were statutorily conferred with the right to mine and produce coal. All existing mines at the time were brought under the umbrella of one behemoth, namely, Coal India Ltd. The situation remains the same today. CIL (along with its subsidiaries) accounted for 415.88 MT representing over 80 per cent of all coal produced in that fiscal while Singareni Collieries Ltd. accounted for 49.37 MT. Other producers, i.e. captive miners in the power, iron and steel, and cement sectors, produced 49.25 MT. However, demand continues to outstrip supply. The following table shows the quantities produced in India along with the demand-supply gap:17 All figures in Million Tonnes 2010-2011 2011-2012 (Revised (Revised as per assessment) mid-term appraisal) 433.50 52.50 52.05 486.50 47.00 96.41
Source
2009-2010 (Actual)
CIL SCCL Others
415.88 49.37 49.25
14 15 16 17
Supra n.3. Supra n.3. Supra n.3. Supra n.12.
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Total
514.50
536.05# Actual numbers stand at 532-533.08 MT according to CMPDI Annual Report 201011 and Coal India Annual Report 201011.# 624.78
629.91
Demand
597.98# This figure

differs marginally from the earlier figure of 582.25 mentioned in the Annual Report 20102011 for the same period.#
713.24
Gap
83.48
88.73
83.33
At first glance, the gap in demand appears to be static at slightly over 80 MT. However, if compared to the actual figures for the FY 2008-2009, the gap has increased from 59.98 MT to 83.48 MT in 2009-2010. The figures of 88.73 and 83.33 are estimates. Based on the actual production figures of 369.41 MT upto December 2010, it remains to be seen whether the production can come up to the estimate of 536.05 MT for the FY 2010-2011. Further, the gap of 83.33 MT for the FY 2011-2012 is based on estimated production figures of 96.41 MT by private participants as against 52.05 MT estimated for the FY 2010-2011. The estimated gap of 83.33 MT could therefore turn out to be much higher when actual figures are available. According to the draft Approach Paper to the 12 th Five Year Plan (2012 2017) prepared by the Planning Commission of India, the shortfall is expected to reach to over 200 MT by 2017 even assuming the domestic production could be enhanced substantially in that period.18
2.3.4 Imports The shortfall in supply is expected to be met by imports. Imports accounted for 69.94 MT in FY 2009-2010.19 Of this, non-coking coal accounted for 44.28 MT and coking coal for 23.46 MT.20 As a percentage of the total coking coal demand, coking coal imports are substantially higher due to that fact that India has small reserves of coking coal which are generally of low quality and hence imports coking coal to meet its requirement.21
18
19 20 21
Faster, Sustainable and More Inclusive Growth, An Approach to the Twelfth Five Year Plan, Para 3.37, page 36, available at http://planningcommission.gov.in/plans/planrel/12appdrft/appraoch_12plan.pdf, Last accessed on 12.12.2011. Supra n.12, p.53. Supra n.12. Supra n.3.
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CHAPTER III : REGULATORY FRAMEWORK
3.1
We have reviewed the following major legislations related to mining, and to the coal sector:22 (a) Mines Act 1952 along with the Mines Rules 1955, and the Coal Mines Regulations 1957; (b) Mines and Minerals (Development & Regulation) Act 1957 along with the Mineral Concession Rules, 1960, and the Mineral Conservation and Development Rules, 1988, and the Mines and Minerals (Development & Regulation) Amendment Act 2010; (c) Coal Mines (Nationalization) Act 1973, and the Coal Mines (Nationalization) Amendment Bill 2000; (d) Coal India (Regulation of Transfers and Validation) Act 2000; (e) Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948, along with the Coal Mines Provident Fund Scheme 1948, the Coal Mines Deposit Linked Insurance Scheme, 1976, and the Coal Mines Pension Scheme 1998; (f) Coal Mines (Conservation and Development) Act 1974 along with the Coal Mines Conservation and Development Rules 1975; (g) Coal Bearing Areas (Acquisition and Development) Act 1957 along with the Coal Bearing Areas (Acquisition and Development) Rules 1957; (h) Colliery Control Order 2000 (issued under the Essential Commodities Act 1955) and the Colliery Control Rules 2004 (issued under the Mines & Minerals (Development and Regulation) Act 1957); (i) Offshore Areas Mineral (Development & Regulation) Act 2002 and the Offshore Areas Mineral Concession Rules 2006
3.2
Other statutes that affect coal production and sales are: (j) Land Acquisition Act 1894; (k) Environment Protection Act 1986 and other environment related legislation;
22
We have excluded certain Acts, Rules, or Regulations, as being either no longer relevant or prima facie outside the scope of this project. Examples are the Coal Mines Pithead Bath Rules 1959, the Coal Mines Advisory Board Rules 1973, the Mines (posting up of Abstracts) Rules 1954, the Mine Crche Rules 1966, the Mines Rescue Rules 1985, the Mining Leases (Modification of Terms) Rules 1956, Mines Vocational Training Rules 1966. We have also excluded the Coal Mines (Taking Over of Management Act) 1973 and the Coking Coal Mines (Nationalization) Act 1972 as the Coal Mines (Nationalization) Act 1973 covers both coking and non-coking coal mines (See Mahindra Nath v. State of Bihar, AIR 1980 SC 1308).
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(l) Foreign Direct Investment Policy; (m) Import Policy.
3.3
In addition, the Ministry of Coal has issued certain notifications, orders, memorandums, which govern production quantities, distribution, and have a bearing on the price of coal as well. Primary amongst these are: (o) the New Coal Distribution Policy 2007, and (p) the Pricing Policy.
3.4
Constitution of India: Before embarking on a brief review of the legislation, it would be useful to mention the constitutional provisions under which the coal related legislation has been passed. Under the Constitutional scheme, the Centre is empowered by virtue of Article 246(1) of the Constitution and Entries 54 and 55 of List I (Union List) of the Seventh Schedule to legislate on regulation of mines and mineral development and regulation of labour and safety in mines and oilfields. However, the State is also empowered by virtue of Article 246(3) and Entries 23 and 50 of List II (State List) of the Seventh Schedule to legislate on Regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union and taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development . It will be noted that both entries give due deference to the Unions overriding authority. The Parliament has legislated extensively on the area of coal mining and production, including providing for the role of the States and the taxes and royalties payable to the States.
3.5
Brief Overview Based on a brief overview of the aforementioned legislations, we have extracted in this chapter those legislations, policies, and practices that have or are likely to have an adverse effect on competition in India. The brief overview and observations relating to the legislations which were thought to have little or no effect on competition have been detailed in Annexure A.
3.5.1 (a) Mines and Minerals (Development & Regulation) Act 1957 3.5.1.1 Preamble: As per the preamble, the Act aims at regulation of mines and development of minerals under the control of the Central Government. The Act is umbrella legislation applicable to all the mining activity to the exclusion of minor minerals which are administered by the State Government. It deals with reconnaissance operations, grant of prospecting licenses and mining lease.
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3.5.1.2 Main Provisions: Coal and Lignite are mentioned in Part A of the First Schedule titled Hydro Carbons Energy Minerals, which are administered by the Central Government. The sections discussed below are both general and specific to the items in First Schedule to the Act which includes Coal and Lignite. 3.5.1.3 Any State Government may, after prior consultation with the Central Government can undertake reconnaissance, prospecting or mining operations with respect to coal and lignite in any area within the State which is not already held under any reconnaissance permit, prospecting license or mining lease23. The State Government is not permitted to grant any prospecting license or mining lease for Coal and Lignite, except with the previous approval of the Central Government24. Similarly no prospecting license granted for Coal and Lignite can be renewed except with the previous approval of the Central Government25. The permit holder of a reconnaissance permit or a prospecting license is given a preferential right for obtaining a prospecting license or mining lease, as the case may be, in respect of that land over any other person26. No mining lease granted for Coal and Lignite can be renewed except with the previous approval of the Central Government27. A mining license lapses upon the expiry of two years from date of execution of lease in the case of non-commencement of mining operations or two years from the date of discontinuation of mining28. The holder of a mining lease is required to pay to the State Government an annual dead rent at the specified rates29. There is a waiver of royalty on the coal in respect of any coal consumed by a workman engaged in a colliery provided that such consumption by the workman does not exceed one-third of tonne per month30. 3.5.1.4 Moreover, the Act empowers the Central Government to make rules for regulating the grant of reconnaissance permits, prospecting licenses and mining leases with respect to Coal and Lignite31. The Central Government is further empowered to make rules for grant of prospecting licenses or mining leases in respect of territorial waters or continental shelf of India32. The Central Government is also empowered to undertake reconnaissance, prospecting or mining operations in certain areas33, and to take all steps as may be necessary for the conservation and systematic development of minerals in India and for protection of environment34. To achieve this, the Central Government can authorise the Geological Survey of India to investigate as directed.35 These powers can be delegated to other authorities as
23 Section 4 (3) of the Mines and Minerals (Development and Regulation) Act, 1957 24 Proviso to Section 5 (1) of the Mines and Minerals (Development and Regulation) Act, 1957. 25 Second Proviso to Section 7 of the Mines and Minerals (Development and Regulation) Act, 1957. 26 Section 11 (1) of the Mines and Minerals (Development and Regulation) Act, 1957. 27 Section 8 (4) of the Mines and Minerals (Development and Regulation) Act, 1957. 28 Section 4A (4) of the Mines and Minerals (Development and Regulation) Act, 1957. 29 Section 9A of the Mines and Minerals (Development and Regulation) Act, 1957. 30 Section 9 (2A) of the Mines and Minerals (Development and Regulation) Act, 1957. 31 Section 13 (1) of the Mines and Minerals (Development and Regulation) Act, 1957. 32 Section 13A of the Mines and Minerals (Development and Regulation) Act, 1957. 33 Section 17 of of the Mines and Minerals (Development and Regulation) Act, 1957. 34 Section 18 of the Mines and Minerals (Development and Regulation) Act, 1957. 35 Section 18A of the Mines and Minerals (Development and Regulation) Act, 1957.
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well.36 3.5.1.5 Mines and Minerals (Development & Regulation) Amendment Act 2010: The Act was amended in 2010 to make a special provision for granting reconnaissance permit, prospecting license or mining lease for companies engaged in captive mining of coal or lignite, though auction and competitive bidding37. These include companies engaged in production of iron and steel, generation of power, washing of coal obtained from a mine and such other end use that the government may by notification in the official gazette specify. The proviso to the section nevertheless makes it clear that competitive bidding shall not be applicable to an area containing coal or lignite, where such area is considered for allocation to a Government Company or Corporation for mining or such other specified end use or where such area is considered for allocation to a company or corporation that has been awarded a power project on the basis of competitive bids. The significant aspect of the 2010 amendment is that it allows for participation of foreign companies in the said competitive bidding process. 3.5.1.6 Mineral Concession Rules, 1960: The Mineral Concession Rules, inter alia, specify the form, manner, and the person to whom the applications for licenses are to be made, the authority by which reconnaissance permits38, prospecting licenses or mining leases in respect of land in which the minerals vest in the Government may be granted39; the conditions to be contained in such reconnaissance, prospecting and mining licences40; preparation of mining plans by recognized persons41 the procedure in the case such lands vest with a private person42; the requirement of previous approval of the Central Government by the State Government43; period for disposal of applications44; royalties payable45; requirement to submit all geophysical data to the Geological Survey of India and the Department of Atomic Energy46. 3.5.1.7 Mineral Conservation and Development Rules, 1988: The Rules, inter-alia, specify the requirement for scheme of reconnaissance and prospecting operations47, approval of mining plans48 to be prepared by qualified persons, authority to direct beneficiation studies49, notice of opening, temporary discontinuance, abandonment, re-opening50,
36 37 38 39
40 41 42 43 44 45 46 47 48
49 50
Section 26 of the Mines and Minerals (Development and Regulation) Act, 1957. Section 11A of the Mines and Minerals (Development and Regulation) Act, 1957. Rules 4-7 of the Mineral Concession Rules 1960 Rules 8-21 of the Mineral Concession Rules 1960 regarding prospecting licence and Rules 22 40 regarding mining leases. Rules 7, 14, and 27 respectively of the Mineral Concession Rules 1960. Rule 22B of the Mineral Concession Rules 1960 Rules 41-55 of the Mineral Concession Rules 1960 Rule 63 of the Mineral Concession Rules 1960 Rule 63A of the Mineral Concession Rules 1960 Rules 64B-64D of the Mineral Concession Rules 1960 Rule 66 of the Mineral Concession Rules 1960 Rules 3 and 4 of the Mineral Conservation and Development Rules, 1988 Rules 9-13 of the Mineral Conservation and Development Rules, 1988 and Rules 23A 23F for closure plans, and Rules 27-30 regarding contents and types of plans and section. Rule 20 of the Mineral Conservation and Development Rules, 1988 Rules 22, 23, 24 of the Mineral Conservation and Development Rules, 1988
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requirement to employ geologists and mining engineers, their qualifications and duties51, returns to be filed, and penalties for violations. The Rules also mandate that all research reports in geology and mining must be shares with the authorities.52 3.5.1.8 Mines and Minerals (Development & Regulation) Bill 2011: On 30.09.2011, the Union Cabinet approved the draft Bill of the new law which seeks to consolidate and replace the existing Mines and Minerals Act 1957. The primary additions in the proposed legislation is the sharing of 26% of the net profit of coal mining companies and 100% of royalty for other mineral mining companies with the people displaced due to such mining activities53. The Bill also proposed to establish a National Mineral Fund54, establish national and state mining regulatory authorities55 and tribunals at state and central levels56. Clause 4 of the Bill states that no person shall undertake reconnaissance, prospecting, exploration, or mining, in respect of any mineral without obtaining an appropriate licence or lease. Sub-clause (2) of Clause 4 however, exempts the Geological Survey of India, Mineral Exploration Corporation Limited, Singareni Collieries Limited, Central Mine Planning and Design Institute Limited, the Directorate of Mining and Geology of any State Government, and such other government agencies as may be notified by the Central Government, from the need to obtain a licence in respect of reconnaissance or prospecting operations. 3.5.1.9 Observations: As discussed earlier, the Act is an umbrella legislation dealing with minerals administered by the Central Government and the State Government. Coal and Lignite are minerals administered by the Central Government. Under Section 11A of the Act incorporated in 2010, the Government has introduced competitive bidding for allocation of coal blocks. However, this is limited to the notified industries of steel, power, and washeries, for captive consumption. Moreover, the section is silent on the kind of coal blocks that will be put up for auction and the Government is empowered to reserve coal blocks for government companies. This again results in CIL and SCCL being allocated prime coal blocks while private companies have to participate in an auction. With respect to the Mines and Minerals Bill 2011, proposed Clause 4(2) exempts government companies from the requirement of obtaining a reconnaissance or prospecting licence. This grants an unfair advantage to companies competing in the market, i.e. CIL through CMPDIL, and Singareni Collieries Ltd.
3.5.2 (b) Coal Mines (Nationalization) Act 1973 3.5.2.1 Preamble: The preamble to the act states that it is a legislation to provide for the acquisition and transfer of the right, title and interest of the owners in respect to the
51 52 53 54 55 56
Rules 42-44 of the Mineral Conservation and Development Rules, 1988 Rule 61 of the Mineral Conservation and Development Rules, 1988 Clause 43 of the draft Mines and Minerals (Development & Regulation) Bill 2011 Clause 50 of the draft Mines and Minerals (Development & Regulation) Bill 2011 Clause 58 and 70 of the draft Mines and Minerals (Development & Regulation) Bill 2011 Clause 75 and 89 of the draft Mines and Minerals (Development & Regulation) Bill 2011
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coal mines specified in the schedule with a view to re-organizing, and re-constructing such coal mines so as to ensure rational coordinated and scientific development and utilization of coal resources consistent with the growing requirements of the country, in order that the ownership and control of such resources are vested in the State and thereby so distributed as best to subserve the common good, and for matters connected therewith or incidental thereto. 3.5.2.2 Main Provisions: As stated in the Preamble to the Act, the purpose of the legislation was to acquire the existing mines at the time and the provisions relate to taking over the management, accounts, and compensating the owners of the mines. The key provision of the Act which is still relevant today is Section 3(3)(a) of the Act. The said provision prohibits any person other than (a) the central government, government company, or corporation, (b) a sub-lessee of the government, or (c) a company engaged in (i) production of iron and steel, (ii) generation of power, (iii) washing of coal, (iv) such other uses as may be specified, from carrying on coal mining operations in any form. Sub-clause (c) of Section 3(3) enhances the prohibition by mandating that a lease for winning or mining coal may be granted only to a government company or corporation, however provides further that a sub-lease may be granted by the government company or corporation to private parties in isolated small pockets not amenable to economic development and not requiring rail transport. Vide notifications dated 15.03.1996 and 12.07.2007 production of cement and production of syn-gas obtained through coal gasification (underground and surface) and coal liquefaction, were notified by the central government as an approved end uses under Section 3(3)(a)(iii)(4). 3.5.2.3 By virtue of Section 4 the Central Government became the deemed lessee of such mines as granted by the state governments under the Mineral Concession Rules 196057. Moreover the lease is renewable for the maximum available period that is allowed by the Mineral Concession Rules. All mines and adjoining properties and assets were transferred (subsequently to CIL) free of any mortgages and any other encumbrances58, which were dealt with by the Commissioner of Payments59under the Coal Mines (Intimation regarding mortgages, charges, lien or other interests) Rules 1974. 3.5.2.4 Coal Mines (Nationalization) Amendment Bill 2000: In the year 2000, the Coal Mines Nationalization Amendment Bill was introduced in the Rajya Sabha. As per the Statement of Objects and Reasons accompanying the Bill, an estimated demand supply gap of 235 MT was expected by 2007, which could not be bridged by the nationalized coal companies. The Bill therefore seeks to introduce Section 3A in the principal Act of 1973 which would permit domestic private companies to mine and produce coal either for own consumption, sale of for any other purpose in accordance with the prospecting licence or mining lease or sub-lease. However, power is sought to be vested in the Central Government to determine the location,
57 58 59
Issued under the Mines and Minerals (Regulation and Development ) Act, 1957. Section 6 of the Coal Mines (Nationalization) Act 1973. Appointed under Section 17 of the Coal Mines (Nationalization) Act 1973.
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size, and other conditions, in relation to the operation of a coal mines by a private company. 3.5.2.5 The Bill was referred to the Standing Committee on Energy which submitted its Report on 31.08.2001, endorsing the passage of the Bill. However, due to opposition by trade unions, and frequent change of government at Union level requiring repeated Cabinet endorsement for the Bill, further delayed its approval.60 3.5.2.6 Observations: It is instantly recognizable from the above review that the Act has a direct bearing on competition in the coal sector by limiting the number of producers in the market and giving government companies exclusive rights over coal production.
3.5.3 (c) The Coal-Bearing Areas (Acquisition and Development) Act, 1957 3.5.3.1 Preamble: The preamble of the Act states that it intends to establish greater public control over coal mining industry and its development by providing for the acquisition by the Government of unworked land containing or likely to contain coal deposits or rights over such lands by modifying or extinguishing current agreements, leases , licenses etc.. 3.5.3.2 Main Provisions: This Act aims at facilitating coal prospecting and acquisition of land for mining by the Central Government. When the Central Government is of the opinion that coal is likely to be obtained in any locality, the Central Government can through notification in the official gazette, give notice of intent to prospect for coal61. Such a notification under Section 4 (1) of the Act shall have the effect of setting aside any license for prospecting coal or any other mineral on the land so notified 62. The said notification also has the effect of setting aside any mining lease in so far as it authorises the lessee or any person claiming through him to undertake any operation in the notified land63. 3.5.3.3 If the Central Government were to be satisfied that the coal is obtainable in the land notified for prospecting, it can within two years of notification for prospecting or further one year thereafter publish in the gazette its intention to acquire the whole or any part of the land notified for prospecting64. Subsequent to the declaration of acquisition under Section 9 of the Act, the land and the rights therein vest with the Central Government65 . 3.5.3.4 The Central Government can thereafter direct and vest the rights in the land on a
60 61 62 63 64 65
Supra n.7, p. 144. Section 4 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957. Section 5 (a) of the Coal-Bearing Areas (Acquisition and Development) Act, 1957. Section 5 (b) of the Coal-Bearing Areas (Acquisition and Development) Act, 1957. Section 7 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957. Section 10 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957.
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Government Company66. The Act also has a grievance redressal mechanism to look into grievances arising out of acquisition proceedings. 3.5.3.5 Observations: The Act primarily gives the government the authority to prospect and acquire coal bearing areas and vest rights of the acquired land in a Government Company. Unlike the Land Acquisition Act which grants general power to the Government to acquire land, the Coal Bearing Areas Act specifically grants power to the Government of India to acquire coal bearing land and vest in any Government Company rights in or over the land. Further, where the rights under a mining lease are acquired under the Act, then from the date of such vesting, the acquirer is deemed to have become the lessee of the State Government.67 The process under the Coal Bearing Areas Act is not available to private companies and therefore puts them at a competitive disadvantage.
3.5.4 (d) Colliery Control Order 2000 (issued under the Essential Commodities Act 1955) and the Colliery Control Rules 2004 (issued under the Mines & Minerals (Development and Regulation) Act 1957) 3.5.4.1 Main Provisions: The Colliery Control Order and the Colliery Control Rules contains identical provisions save for a penalty provision68 and exemptions for acts in good faith69 which are included in the Rules. The Order and Rules empower the Central Government to prescribe the criteria for categorization of coal70 and the Coal Controller for prescribing the procedure for the categorization of coal 71, inspection of collieries72 and quality surveillance73, etc. The Coal Controller74 has also been empowered to issue directions to any colliery owner regulating disposal of stocks of coal75, prohibiting or limiting the mining or production of any grade of coal 76 and the requirement of prior permissions to open77 or sub-divide78 a coal mine. 3.5.4.2 Observations: Although coal was earlier classified as an essential commodity in terms of the Essential Commodities Act, 1955, with the enactment of the Essential Commodities (Amendment) Act, 2006, coal stands omitted from the list of essential commodities. The said Amendment Act came into force with effect from 12.02.2007. Thus, Colliery Control Order 2000 is not applicable to coal with effect from 12.02.2007.
66 67 68 69 70 71 72 73 74
75 76 77 78
Section 11 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957. Supra n.3, P.115. Rule 13 of the Colliery Control Rules 2004. Rule 14 of the Colliery Control Rules 2004. Clause 3 of the Colliery Control Order 2000 and Rule 3 of the Colliery Control Rules. Clause 4 of the Colliery Control Order 2000 and Rule 4 of the Colliery Control Rules. Clause 12 of the Colliery Control Order 2000 and Rule 12 of the Colliery Control Rules. Clause 7 of the Colliery Control Order 2000 and Rule 7 of the Colliery Control Rules. By virtue of delegation by the Central Government under Clause 13 of the Colliery Control Order 2000 and Rule 15 of the Colliery Control Rules. Clause 6 of the Colliery Control Order 2000 and Rule 6 of the Colliery Control Rules. Clause 8 of the Colliery Control Order 2000 and Rule 8 of the Colliery Control Rules. Clause 9 of the Colliery Control Order 2000 and Rule 9 of the Colliery Control Rules. Clause 11 of the Colliery Control Order 2000 and Rule 11 of the Colliery Control Rules.
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3.5.4.3 The Rules however, still have a direct bearing on competitiveness or potential competitiveness in so far as the categorization of coal is concerned and the power to regulate production and sale quantities by any company given to the Coal Controller. The Central Government has recently decided to change the system of grading of coal. Until January 1st 2012, coal was categorized into seven grades (A-F) depending on the Useful Heat Value (UHV) of the coal, which is a fraction of the carbon, volatile matter and ash content in the coal.79 Internationally coal is graded according to its Gross Calorific Value (GCV), which links the heat generated by the coal in a much narrower range than the UHV system. Coal India Ltd., vide a Notification dated 31.12.2011, has categorized coal into 17 bands and published its revised prices corresponding to each band with effect from the 1 st of January 2012. The earlier system had the effect of distorting price realization as the grades were too broad and the price of the coal was not linked closely to its quality. However, this has lead to an increase in the prices of coal. According to one report 80 apart from the power, fertilizer, and defence sectors, the price of coal for the lower and middle bands is 15% higher than that of comparable coal produced in other coal producing countries.
3.5.5 (e) Land Acquisition Act 1894 3.5.5.1 The Government is empowered to use the provisions of this Act to acquire private land for a public purpose. Under the provisions of the Land Acquisition Act, the following procedure is required to be followed: identification of land; notification of land; declaration of land; acquisition of land; and payment and ownership of land. 3.5.5.2 However, any person having an interest in such land has the right to object to such acquisition and has the right to receive compensation. The value of compensation for the property acquired depends on several factors, which, among other things, include the market value of the land and damage sustained by the person in terms of loss of profits. The land owner can raise objections in relation to the amount of compensation but cannot challenge the fact that any particular land is needed for a public purpose or for a company once a declaration to the same effect has been issued by the appropriate government. The term public purpose has been defined to include, among other things:
79
80
Ministry of Steel Government of India, Glossary of Term/ Definitions Commonly Used in the Iron and Steel Industry. http://steel.nic.in/Glossary.htm, Last accessed on 13.12.2011. Pratim Ranjan Bose, New coal pricing will reduce inconsistency in quality of supply, The Hindu Business Line, rd Jan 3 2012, http://www.thehindubusinessline.com/companies/article2772157.ece, Last Accessed on 04.01.2012 .
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the provision of village sites, or the extension, planned development or improvement of existing village sites; provision of land for town or rural planning; provision of land for the planned development of such land from public funds pursuant to any scheme or policy of the government and subsequent disposal thereof in whole or in part by lease, assignment or outright sale with the object of securing further development as planned; the provision of land for a corporation owned or controlled by the state; the provision of land for any other scheme of development sponsored by the government, or, with the prior approval of the appropriate government, by a local authority; and the provision of any premises or building for locating a public office, but does not include acquisition of land for companies. the provision of land for a corporation owned or controlled by the state. 3.5.5.3 In addition, certain states have amended the central statute and framed their own rules for compulsory land acquisition. A company has to abide by the State legislations in those states in which it conducts its business, in addition to the Central legislation. 3.5.5.4 Observations: As discussed earlier in this Report, the procedures under the Land Acquisition Act and the Coal Bearing Areas Act differ in favour of the government coal companies. The effect of this difference is examined further later in this report.
3.5.6 (k) Environment related legislation81 3.5.6.1 Clearances by the Ministry of Environment and Forests (MoEF) is required under the Environment (Protection) Act, 1986, as amended, the Forest Conservation Act 1980, if any forest land is involved, the Air (Prevention and Control of Pollution) Act, 1981, the Water (Prevention and Control of Pollution) Act, 1974, as amended, and the Water (Prevention and Control of Pollution) Cess Act, 1977, are required before commencing the operations of the mines. Applications are made through the respective State Governments who then recommend the application to the Government of India. 3.5.6.2 Environment Protection Act: The Act has been formulated by the Central Government for the protection and improvement of the environment in India and for matters connected there with. The Act also prohibits any person carrying on any industry, operation or process from discharging or emitting or permitting to be discharged or emitted any environmental pollutants in excess of such standards as may be prescribed.82 The Central Government has been provided with broad rule
81
82
This overview relies on information provided in pages 120-122 of the Coal India Final Prospectus dated October 26, 2010, save for the parts relating to the go/no go policy adopted by the Ministry of Environment in 2009 and the Comprehensive Environment Pollution Index Notification of January 2010. Section 7 of the Environment Protection Act 1986.
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making powers, such as, (a) the standards of quality of air, water or soil for various areas and purposes; (b) the prohibition and restriction on the location of industries and the carrying on process and operations in different areas; and (c) the procedures and safeguards for the prevention of accidents which may cause environmental pollution and for providing for remedial measures for such accidents. 3.5.6.3 In 2006, the Government of India issued another Notification No. S.O. 1533(E) dated September 14, 2006, (2006 EIA Notification), according to which all new projects, expansion of existing projects, product-mix activities and projects require prior environment clearance if they are listed in the schedule to the said notification. The projects and activities listed under category A of the schedule require clearance from the regulatory authority constituted by the Central Government, whereas, the projects and activities listed under Category B are required to obtain clearance from State Environment Impact Assessment Authority, (SEIAA). The SEIAA will base its decision of granting prior environment clearance on the basis of the recommendations of the State Expert Appraisal Committee (SEAC) while the Central Government will grant prior environmental clearance for category A projects on the basis of the recommendations of the Expert Appraisal Committee (EAC) to be constituted as per this notification. If the SEIAA or the SEAC is not constituted in any state then the Category B project will be deemed to be Category A project. The notification provides for four stages for prior environment clearance. However not all stages apply to all projects. The four stages are: (i) Screening: During this process the appraisal authority shall determine whether there is a requirement of Environment Impact Assessment Report to be submitted as per the guidelines given by the Central Government in this context. (ii) Scoping: During this process the appraisal committee will determine the Terms of Reference for each of the category (i.e. category A and B 1 projects). TOR will be conveyed to the applicant within 60 days of receipt of the application in prescribed format. (iii) Public Consultancy and Public Hearing: This process involves obtaining and receiving objections and other concerns of local affected persons and others who have a stake in the project and its impact. Public Hearing should be conducted by the State Pollution Control Board or the Union Territory Pollution Control Committee within 45 days from the date of receiving the application from the project proponent to this effect. (iv) Appraisal: SEAC or EAC accordingly shall consider the final Environment Impact Assessment report and the outcome of public consultation and other documents and make recommendations to the regulatory authority. They may recommend granting prior environmental clearance on stipulated terms and conditions or rejecting the applications recording the reasons for the same. 3.5.6.4 Mining of minerals with a mining lease area of over 50 hectares is listed as a Category A project mining lease area of between 5 and 50 hectares is listed as a Category B project. Prospecting (not involving drilling) is exempted. Coal washeries with an annual output of over one million tonnes are listed as Category A projects,
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however, if located within mining area the proposal is to be appraised together with the mining proposal. 3.5.6.5 Forest Conservation Act 1980: In case forest lands are involved, the mining lease can be executed only after obtaining the forest clearances. The Act provides that no State Government or any other authority shall authorize, without the prior approval of the Central Government, that any forest land or any portion thereof may be used for any non-forest purpose where non-forest purpose refers to the breaking up or clearing of any forest land or portion thereof for: the cultivation of tea, coffee, spices, rubber, palms, oil-bearing plants, horticultural crops or medicinal plants; or any purpose other than afforestation but does not include any work relating or ancillary to conservation , development and management of forests and wildlife. 3.5.6.6 Air & Water Acts: Under the Air and Water Acts, a company responsible for emitting smoke or gases by way of use as fuel or chemical reactions or for discharging industrial or domestic wastewater, respectively, is required to make an application to the state pollution control boards. The consent to operate is granted for a specific period after which the conditions stipulated at the time of granting consent are reviewed by the state pollution control board. In the event of noncompliance, the state pollution control board may take necessary measures to ensure compliances, and even mandate closure the mine or. 3.5.6.7 Water Cess Act: Mining is a specified industry under the Water Cess Act and a lessee is required to pay the surcharge as stipulated on the basis of water consumed. The assessing authority at the state level levies and collects the surcharge based on the amount of water consumed by such industries. The rate is also determined on the basis of the purpose for which the water is used. Based on the surcharge returns to be furnished by the industry every month, the amount of cess is assessed by the relevant authorities. A rebate of up to 25% on the surcharge payable is available to those industries which install any plant for the treatment of sewage or trade effluent, provided that they consume water within the quantity prescribed for that category of industries and also comply with the effluents standards prescribed under the Water Act or the Environment Act. 3.5.6.8 Go-No Go Policy: In June 2009, the Ministry of Environment & Forests and the Ministry of Coal initiated an exercise to identify prima facie go and no-go areas for coal mining. Go areas were those where, prima facie, the statutory Forest Advisory Committee in the MoEF considered proposals for diversion of forests land for coal mining purposes. No-go areas were those areas with rich forest cover and biodiversity where applications were not entertained for forest land diversion. The concept behind the policy was to avoid the uncertainty. Prior experience showed that companies would apply for forest clearance for coal blocks and have to wait a number of years only to have them eventually rejected as they were in dense forest areas. By identifying such areas in advance, the companies could apply only in the
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'go' areas.83 3.5.6.9 A preliminary exercise indicated areas in nine major coal-fields of the country as go or no-go. A ban on mining was imposed in the 'No-Go' zones.84 Based on this categorisation, the ministry has barred mining in 203 coal blocks that hold 660 million tonnes reserves and 1,30,000-mw electricity generation potential, as they fall in the 'No-Go' or dense forest zone.85 However, according to recent reports, the policy has been discontinued as of September 2011.86 The system therefore reverts to the earlier method of applying for forest clearance and waiting out the necessary period hoping for clearance. 3.5.6.10 Comprehensive Environment Pollution Index (CEPI): CEPI is an index of industrial clusters across India, ranked according to their impact on environment and was developed to plan developmental projects in tandem with environmental protection. Vide Office Memorandum/Notification dated January 13, 2010, the Ministry stated that of the 88 industrial clusters in the country, it has found 43 having CEPI score of more than 70 (being critically polluted), and imposed a temporary ban on development works, including some coal mining projects in Jharkhand and Chattisgarh. However, a temporary moratorium was granted till October 2010. Subsequently, in another notification on October 26, 2010 the Ministry lifted the moratorium on environmental clearance in five areas but extended the moratorium on the remaining ones till March 31, 2012. 3.5.6.11 Observations: This area is one where a delicate balance is sought to be maintained between the often conflicting goals of protecting the environment and that of ensuring energy security in the country. This friction is well recognized by the Central Government. In relation to the recent Go-No Go and CEPI policies adopted by the Ministry of Environment, the Planning Commission has noted in its draft Approach Paper to the 12th Five Year Plan, that large coal bearing areas were suddenly declared No Go areas, and this severely limited the ability to expand domestic production of coal. It also noted that CEPI norms prohibited mining in areas with a high pollution index, even if the pollution was due to other industrial sources. Coal being location specific, there is clearly a need to review this approach. A Group of Ministers is said to be working on resolution of these issues as it is essential that an appropriate balance be struck between the need to protect the environment and the need for energy security. 87
83
Avinash Celestine, Coal mining policy: The dismantling of the 'go, no-go' policy may do little to improve th supplies of coal, The Economic Times, 25 Sept 2011, See http://articles.economictimes.indiatimes.com/2011-09-25/news/30198471_1_coal-shortage-coalmining-coal-and-environment-ministries, Last accessed on 30.09.2011. 84 Press Information Bureau Release dated 18.06.2009. See also Press Release dated 8th July 2010 issued by the Ministry of Environment and Forests. 85 st Neeraj Thakur, Coal mining: Centre dumps go, no -go, dubs it illegal, Daily News & Analysis , 21 Sept 2011, See http://www.dnaindia.com/money/report_coal-mining-centre-dumps-go-no-go-dubs-itillegal_1589631, Last Accessed on 19.10.2011. 86 Ibid & Supra n.83. 87 Supra n.18, para 3.40, pgs 49-50.
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3.5.7
Import Policy
3.5.7.1 As per the present Import Policy, coal can be freely imported (under Open General Licence) by the consumers. Currently while import duty on coking coal is nil, import duty on non coking coal and coke is 5%. 3.5.7.2 Observations: Presumably realizing the lack of good quality coking coal required by the iron and steel sector, the import duty on coking coal has been kept at nil. However, there is a 5% duty on non-coking coal and coke. While marginal, given the demand supply gap and the objective of making the domestic coal producers more competitive, this may need revision. This is discussed in further detail in the following chapter.
3.5.8 New Coal Distribution Policy, 2007 3.5.8.1 On October 18, 2007, the Ministry of Coal issued the New Coal Distribution Policy in order to regulate the distribution of coal. This policy dispenses with the classification of consumers core and non-core sectors and instead treats each new consumer on merit. The salient features of the Policy are as follows: The Defence and the Railways sector would receive 100% of their normative coal requirement at the notified price; Power (utilities), including Independent Power Producers ("IPP")/Captive Power Plants ("CPP"), the fertilizer sector, would receive 100% of their normative coal requirement at prices notified by Coal India Ltd.; All other consumers would receive 75% of their coal requirement at prices notified by Coal India Ltd. and the balance would be met through e-auction scheme and imports; All consumers through the erstwhile linkage system to enter into Fuel Supply Agreements (FSA) with Coal India Ltd.; Supply of coal to steel plants would be based on FSA and pricing would be on import parity pricing; Consumers in the small and medium sector, requiring coal less than 4200 tons annually will take coal either from the State Government Notified Agencies or from CIL through FSAs at the same notified price; New consumers such as power utilities, IPP, CPP, fertiliser and cement manufacturers will be issued with a Letter of Assurance ("LOA"), with a validity of 24 months which can be converted to an FSA on successfully meeting certain criteria; The existing Standing Linkage Committee (Long Term)88 will continue to
88
The Linkage Committee is an inter-ministerial committee under the aegis of Ministry of Coal that includes representatives from CIL, its subsidiaries, CMPDIL, the Ministry of Steel, the Ministry of Commerce and Industry, the Ministry of Railways, the Ministry of Surface Transport, the Central Electricity Authority of India, and SCCL. In light of the NCDP, vide Office Memorandum of the Ministry of Coal dated 12.08.2010,
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recommend LOAs in respect of power utilities, IPP, CPP, cement and steel manufacturers; CIL to meet the full requirement of coal under the FSAs even by resorting to imports if necessary; After the execution of FSAs, parties to try to execute a tripartite agreement (FSTA) with the transport provider (Railways) as well; Introduction of an e-auction scheme by CIL, which will include provide for (i) access to any buyer, (ii) no floor price but rather an undisclosed reserve price not lower than the notified price, (iii) announcing the programme of e-auction well in advance and with sufficient publicity, (iv) an announcement by CIL at the beginning of each financial year declaring the quantity and quality of coal to be available through e-auction, and the location from which it would be available, (v) initially around 10% of CIL production to be earmarked for e-acution. 3.5.8.2 Currently approximately 10.0% of CILs aggregate raw coal production is offered under the e-auction scheme. This quantity is reviewed from time to time by the Ministry. 3.5.8.3 With the amendment to the Mines and Minerals (Development and Regulation) Act in 2010, a system of allocation of coal blocks for specified end uses through auction by competitive bidding has been introduced. The Coal Ministry is seeking to formulate appropriate new guidelines for allocation of coal blocks 89 in accordance with the amendment. 3.5.8.4 Observations: The Distribution Policy has a direct bearing on competition in the sector and its effects are discussed in the next chapter.
3.5.9
Pricing
3.5.9.1 Since 1945, the price at which the various types and grades of coal were sold was controlled by the Central Government, under the provisions Colliery Control Order of 1945. Beginning in March 1996, the Government gradually deregulated the price of various types and grades of coal. The pricing of coal in India was completely deregulated pursuant to the Colliery Control Order, 2000 with effect from January 1, 2000. As no other companies are allowed in the field, coal pricing is now entirely dependent on the price notified by Coal India Ltd. 3.5.9.2 Unlike a normal monopolist, however, the price CIL is able to fix is influenced by the requirements of the overall development in the country, and primarily that of the power sector. Thus, the price fixed by CIL under the FSAs with the erstwhile core consumers is reasonable compared to what a private sector monopolist would have been in a position to fix. This is evident from the prices fixed for the 10% coal allocated for sale through the E-Auction scheme and for the sale of higher grade
the Standing Linkage Committee (Shot Term), which used to meet on quarterly basis for allocation of coal to the power and cement sectors, was discontinued. Answer by the Minister of Coal to unstarred question No. 3553 in the Lok Sabha dated 24.08.2011.
89
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coal and beneficiated coal under specific memoranda of understanding entered into with the customer. According to the Revision of reserve price for the spot e auction Letter from CIL dated 24.03.2010, the Board of CIL had decided to raise the floor price (i.e. the reserve price) from 100% to 130% of the notified price. 90 3.5.9.3 Similarly, during the FY 2009-2010, higher quality non-coking coal, namely, Grade A, B and C coal with gross calorific value greater than 5,597 Kcal/Kg, was approximately 92.0%, 99.0% and 96.0%, respectively, higher than the notified price of such grades of non-coking coal.91 3.5.9.4 As a percentage of sales volume e-auction sales accounted for 11.24% of total CIL sales while higher grade and beneficiated coal accounted for approximately 5.96% of total CIL sales in the FY 2010-2011.92 As a percentage of sale value, e-auction sales accounted for 17.54% of total CIL sales while higher grade and beneficiated coal accounted for approximately 12.22% of total CIL sales in the same period. 93 3.5.9.5 However, approximately 82% of the coal produced by CIL is sold under FSAs. 94 The price of non-coking coal and coking coal to be supplied under the FSAs is fixed by CIL in consultation with the Government of India and notified by CIL from to time. Since complete deregulation of pricing with effect from January 1, 2000, there have been five revisions in notified coal prices: (i) January 31, 2001, (ii) June 15, 2004, (iii) December 12, 2007, (iv) October 16, 2009, and (v) February 27, 2011. The average price increase was approximately 8.5%, 16.2%, 10.0% and 11.0%, respectively. On an annualized basis, the increase in the price of coal from January 2000 to March 31, 2010 was 4.9% which is lower than average inflation rates in India in this period.95 3.5.9.6 The current prices of various types and grades of coal are specified in the notification dated 26th February 2011 which came into effect the following day. A comparison with the prices prevailing in the period prior to February would show over a 100% increase for grades A and B in non-coking coal for all consumers. For consumers other than power utilities, fertilizer and defence sectors, the price of the other grades of non-coking coal, as well as the price of coking coal, has been increased significantly. The average price increase across the board is approximately 30% with the cement and sponge iron manufacturers expected to be affected the most. 3.5.9.7 The price fixed by CIL for raw coal sold through FSAs is estimated to be significantly lower than the international prices, (after adjustment as per a gross calorific value basis of comparison96) while the price of the higher quality grades and beneficiated
90 91 92 93 94 95 96
http://www.coalindia.in/ Supra n.3, p. 190. Coal India Annual Report & Accounts 2010-2011, p. 100 Coal India Annual Report & Accounts 2010-2011, p. 100 Coal India Annual Report & Accounts 2010-2011, p. 100 Supra n.3, p. 189 Supra n.3, p. 189
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coal is said to be approximately 15% lower than the prevailing landed cost of comparative quality coal.97 However, with effect from 1st January 2012 the GCV method has been implemented by CIL resulting in coal being classified into 17 bands (in place of the seven grades under the UHV system) and prices being increased for correspondingly for each band. As noted earlier in this Chapter, according to one report98, apart from the power, fertilizer, and defence sectors, the price of coal for the middle bands close to the GCV 5300 kcal coal is 15% higher than that of indigenous Indonesian coal. 3.5.9.8 Observations: Price regulation has obvious ramifications to competitiveness in the sector, and is discussed in further detail in the following chapter.
3.6
Competition Issues
3.6.1 A preliminary review of the legislation applicable to the coal sector in India has revealed that the following legislation affect, or have the potential to affect, competition in the coal sector: Coal Mines (Nationalization) Act 1973 Coal Bearing Areas (Acquisition & Development) Act 1957 Colliery Control Rules 2004 Mines and Minerals (Development & Regulation) Bill 2011 Environment related legislations and policies Import policy New Coal Distribution Policy 2007 Pricing Policy 3.6.2 The primary objective of nationalisation was to increase capital investment in the coal sector, given the rising demand for coal99. Nationalisation was also undertaken to prevent unscientific mining, bring about better working conditions of workers especially better health, housing and education standards for workers. Nevertheless it so appears that the objective behind nationalisation has not been fully achieved given the continued shortage of coking and non-coking coal and deteriorating quality of thermal coal,100 though mine safety issues have been addressed. 3.6.3 Even the mode of exploitation of resources has been inefficient resulting in sterilising significant portions of existing coal reserves101. The same is because in
97 98
Supra n.3, p. 190 Pratim Ranjan Bose, New coal pricing will reduce inconsistency in quality of supply, The Hindu Business Line rd , Jan 3 2012. http://www.thehindubusinessline.com/companies/article2772157.ece, Last accessed on 06.01.2012. 99 Supra n.7 , p. 139. 100 Supra n.7, p. 139. 101 Integrated Energy Policy , Report of Expert Committee , Planning Commission , Government of India ,
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open cast mines the coal is mined only to the depth of 150 meters. At the current production levels the known extractable reserves may be depleted in the next 45 years, moreover a large proportion of coal reserves may not be extractable102. There has been a deterioration of the quality of domestic thermal coal due to increased reliance on cost effective open cast mining operations103. However, the lignite resources in the country have been estimated to be adequate to meet the projected demand104. 3.6.4 Based on the foregoing statutory and regulatory review the following issues affecting the competitiveness of the sector have been identified, the categorisation has been made from an impact on competition view point105. The issues have been identified on the basis of the criteria mentioned in the Competition Checklist (Annex 3 of the TOR). The issues and the relevant entries in the Competition Checklist have been discussed in the table below. The analysis in Chapter IV of this report details the relevant statutory provision, regulation, rule, industry practice etc and suggests remedial pro-competitive measures:
102 103 104
105
August 2006, P.117, http://planningcommission.nic.in/reports/genrep/rep_intengy.pdf, Last Accessed on 20.12.2011 Ibid, P.117. Ibid, P.116. Report of the Expert Committee on Road Map for Coal Sector Reforms , Part II, Ministry of Coal , Government of India, Oct 2007, Paras 1.31, 1.32, 1.34, 1.35, p. iv, http://coal.nic.in/expertreport2.pdf, Last Accessed on 20.12.2011 Issues in the Captive Mining segment and Coal India have been dealt with separately as captive mining is supposed to supplement the production in CIL & SCCL. It is in this context that it becomes necessary to understand the dynamics between the two.
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No.
Issue
Relevant Entries in the Competition Checklist
1.
Prohibition on private sector participation in coal reconnaissance, prospecting or mining and production.
A1, A3, B3 Grants exclusive rights to a supplier (Ministry of Coal / CIL / SCCL) to provide goods or services (i.e. mining, production, and sale of coal). Limits (statutorily) the number of firms permitted to enter the market. Only state-owned enterprises operate in the market. They receive benefits or preferential treatment not available to other firms which have the effect of limiting competition in the coal sector.
2.
Inadequate data and inaccessibility of data on extractable coal reserves for private players.
A4, D2 Limits the ability of some types of suppliers to provide a good or service Firms in the market suffer from the unequal application of laws or regulations.
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Allocation of Coal Blocks & acquisition of surface rights and mining clearances for private companies.
A1 , A4 , D2 Section 11A of the Mines and Minerals Development and Regulation Act, 1957, Reinforces the exclusive rights granted to government companies to provide coal by restricts private player participation in the grant of reconnaissance permit, prospecting license or mining lease to sectors where captive mining is allowed. Moreover, the section is silent on the kind of coal blocks that will be put up for auction and the Government is empowered to reserve coal blocks for government companies. This again results in CIL and SCCL being allocated prime coal blocks while private companies have to participate in an auction. With respect to the Mines and Minerals Bill 2011, proposed Clause 4(2) exempts government companies from the requirement of obtaining a reconnaissance or prospecting licence. This grants an unfair advantage to companies competing in the market, i.e. CIL through CMPDIL, and Singareni Collieries Ltd. B3 Sec. 11 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957 State-owned enterprise/s operate in the market/s being assessed and receive benefit/s and preferential treatment not available to other firms.
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4.
Changing environmental policies, and considerations delaying grant of prospecting permits and mining leases.
D1 The sector subject to policies or regulations that are onerous, costly time-consuming, and frequently change, thereby creating policy uncertainty. The issue of delays due to time consuming environmental clearances and uncertainty over the outcome has been documented in earlier reports of expert committees. The frequent changing policies and rules adopted in the failed experiment of the recent Go-No Go and CEPI policies have added to the uncertainty and have been blamed for the fall in production levels. While this is primarily an issue concerning the removal of bottlenecks it acts as a disincentive for other potential suppliers to enter and compete in the sector.
5.
The various advantages granted to CIL due to nationalization in 1973 and the incumbency benefits enjoyed by CIL over the last 35 odd years. Non Working of Coal Blocks and Mining Licenses by CIL does not invite cancellation.
B3 State-owned enterprise(s) receiving benefits and preferential treatment not available to other firms which appear to have the effect of limiting competition in the relevant market. High sunk costs. B3 State-owned enterprise(s) receiving any benefit(s) or preferential treatment not available to other firms which appear to have the effect of limiting competition in the relevant market.
6.
7.
Price Distortions
B1, B5 Limits sellers ability to set the prices for goods or services. The under-development of transport and other infrastructure appears reinforces the monopoly status of the incumbent firms and reduces any potential competition.
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8.
B5 The under-development of transport and other infrastructure appears reinforces the monopoly status of the incumbent firms and reduces any potential competition. C1 Creates a self-regulatory or co-regulatory regime.
9.
Need for Coordination
Regulatory
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CHAPTER IV: ANALYSIS & RECOMMENDATIONS
4.1
The issued identified at the end of the previous chapter are discussed hereunder: I. Entry level barriers a. Inadequate data and lack of accessible data on extractable coal reserves b. Prohibition on private sector participation in Coal exploration. c. Allotment of coal blocks, surface rights and mining clearances d. Changing environmental policies e. Incumbency benefits enjoyed by CIL
4.2
I.a. Inadequate data on extractable coal reserves
4.2.1 At present detailed coal exploration is done exclusively by CMPDIL which is a subsidiary of CIL. Given the same such data pertaining to exploitable reserves becomes inaccessible or very expensive for private sector coal companies. Most of the exploration i.e. prospecting activity is done by the government agencies and companies and the private players will have to purchase this information otherwise available and easily accessible to the government companies. 4.2.2 The current relationship between CIL & CMPDIL is leading to information asymmetry in the sector; therefore CMPDIL must be made an autonomous institute. There is a need to have other organisations in addition to CMPDIL with the capability to plan and execute underground mines. The mine planning division of Singareni Collieries Company Limited could be strengthened in this regard106. 4.2.3 A level playing field must be granted to all organisations engaged in coal mine planning and development. In fact all the data related to coal retained by CMPDIL should be kept in the public domain and only such data which is relevant for the work of CIL must be retained107. 4.2.4 In those areas not covered by proven reserves with geological reports, the private sector may be invited to participate in exploration at their risk partly shared with the government on the lines of New Exploration Licensing Policy (NELP) followed in the oil sector108. Taking note of the enthusiasm for coal mining among major coal users their efforts must be enlisted even for exploration for coal resources109.
106 107
Supra n.104, Para 3.24, p. 62-63. Supra n.104, Para 3.25, P.63. 108 Supra n.104, para4.18, p.74. 109 Supra n.104 , para 1.25,p.19.
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4.3
I.b. Prohibition on private sector participation in Coal reconnaissance, prospecting or mining.
4.3.1 Section 3(3)(a) of the Coal Mines (Nationalization) Act 1973 Act, prohibits any person other than (a) the central government, government company, or corporation, (b) a sub-lessee of the government, or (c) a company engaged in (i) production of iron and steel, (ii) generation of power, (iii) washing of coal, (iv) such other uses as may be specified, from carrying on coal mining operations in any form. Sub-clause (c) of Section 3(3) enhances the prohibition by mandating that a lease for winning or mining coal may be granted only to a government company or corporation, however provides further that a sub-lease may be granted by the government company or corporation to private parties in isolated small pockets not amenable to economic development and not requiring rail transport. 4.3.2 The first and primary criterion to determine whether a legislation, policy or practice has an adverse effect on competition is to assess whether it limits the number of suppliers in the market for a particular product and/or grants an exclusive licence on certain participants to the exclusion of others. The essence of competition is increased number of participants in a defined product market. Limiting the number of suppliers in the market leads to the risk that market power will be created and competitive rivalry will be reduced.110 Market power is the ability to profitably increase price, decrease quality, or decrease innovation relative to the levels that would prevail in a competitive market.111 4.3.3 In the case of the coal industry in India, the legislation restricts entry and confers exclusive rights, by statutorily limiting the production of coal to government companies. In terms of the effects on competition in the coal sector therefore the Coal Mines Nationalization Act 1973 creates and maintains a monopoly in favour of the public sector by virtue of Section 3 of the Act which prohibits private companies from entering the field. Although the Nationalization Act does not confer a monopoly on a particular company, in reality there is no competition between public sector companies. Unlike the petroleum sector in which some level of competition appears to exist between public sector companies112, Coal India Ltd. controls 80-82% of the market production in the coal sector. The closest competitor is Singareni Collieries Ltd., with a 9.5-11.5% market share, and in which Central Government owns 49% of the shareholding. Moreover, the Ministry of Coal governs the overall policy decisions of both companies. The Government could consider promoting state level public sector companies and reduce coordination and regulation over these companies so that they become true competitors to CIL.
110
111 112
OECD Competition Assessment Toolkit, Volume 1- Competition Assessment Principles, 2011, http://www.oecd.org/dataoecd/52/6/46193173.pdf, Last Accessed on 04.01.2012. Ibid. IOC sees PSU rivals eat into market share, Business Standard, See http://www.businessth standard.com/india/news/ ioc-sees-psu-rivals-eat-into-market-share/134787/on , May 11 2011, Last Accessed on 04.12.2011.
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4.3.4 The Coal Mines Nationalisation Amendment Bill 2000 aimed at opening up the sector for private participation. However, it could not be passed given the opposition from the unions. Pending the passing of the Coal Mines (Nationalisation) Amendment Bill, 2000, other avenues permitted under existing legislation need to be resorted to so as to increase the number of players in the sector.113 The same include Encourage mining by State Government public sector companies. Captive users must be allowed to sell incidental coal surpluses, during the development and operation of a block to CIL or other third parties. Group captive mines must be allowed for small end users. Those allotted captive blocks must work the block within a stipulated period of time failing which the allotment either stands cancelled or a penalty is imposed 114. This should apply to government companies as well.
4.4
I.c. Allotment of coal blocks, surface rights and mining clearances Issue
4.4.1 Section 11 and 11A of the Mines and Minerals Development and Regulation Act, 1957 reinforces the exclusive rights granted to government companies to provide coal by restricting private player participation in the grant of reconnaissance permit, prospecting license or mining lease to sectors where captive mining is allowed. Moreover, the section is silent on the kind of coal blocks that will be put up for auction and the Government is empowered to reserve coal blocks for government companies. This again results in CIL and SCCL being allocated prime coal blocks while private companies have to participate in an auction. With respect to the Mines and Minerals Bill 2011, proposed Clause 4(2) exempts government companies from the requirement of obtaining a reconnaissance or prospecting licence. This grants an unfair advantage to companies competing in the market, i.e. CIL through CMPDIL, and Singareni Collieries Ltd.. 4.4.2 Section 11 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957, allows the Central Government to vest the land acquired in a government company. Solution 4.4.3 The amendment to the MMRDA is a salutary step as it seeks to grant coal blocks impartially and transparently on the basis of auctions. Further, participating firms are likely to develop the block won in the auction as soon as possible and not delay progress has been the case with the many coal blocks allocated to the private sector. However, the provision may be amended to include public sector companies in the
113 114
Supra n.101, pgs 118 119. Supra n.101, pgs 118 119.
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bidding process, i.e. remove the power of the Government to reserve coal blocks for allocation to CIL and its subsidiaries. The pro-competitive implementation of the provision would also depend of the scheme of auction, which is presently being formulated by the Ministry. 4.4.4 Section 11 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957, may be appropriately amended so that a similar treatment is extended to private players as well.
4.5
I.d. Changing Environmental policies The Issue
4.5.1 Continually changing environmental policies are causing uncertainty and long delays in obtaining clearances. The sector subject to policies or regulations that are onerous, costly time-consuming, and frequently change, thereby creating policy uncertainty. The issue of delays due to time consuming environmental clearances and uncertainty over the outcome has been documented in earlier reports of expert committees. The frequent changing policies and rules adopted in the failed experiment of the recent Go-No Go and CEPI policies have added to the uncertainty and have been blamed for the fall in production levels. While this is primarily an issue concerning the removal of bottlenecks it acts as a disincentive for other potential suppliers to enter and compete in the sector. Solution 4.5.2 A Group of Ministers is said to be working on resolution of these issues while striking an appropriate balance between environment protection and energy security. A clear policy needs to be adopted with procedural rules that incorporate strict time lines for clearances.
4.6
I.e. Incumbency benefits enjoyed by CIL & CILs position post privatization The Issue
4.6.1 The Nationalization Act 1973 had the effect of conferring the following significant advantages on CIL at the time of nationalization by: acquiring and conferring all mines to CIL without the company having to pay any compensation, the company became a deemed lessee under the Mineral Concession Rules for the maximum available period, the company did not inherit any liabilities, mortgages or other charges in relation to the mines conferred on it, the company enjoys the incumbency benefits accruing to it for over 35 years of
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exclusive protection. 4.6.1 CIL has also received budgetary support from the Government over the years, including for building rail infrastructure for transport of the coal produced by it. Further, in 1995 1996 the company again benefited from a financial restructuring package by the Government, whereby Rs. 8,917 million of interest liability was waived, Rs. 9,041.8 million of plan loan repayment arrears was converted to preference equity and Rs. 4,326.4 million of non plan payment arrears were allowed a moratorium for repayment and interest accrual for a period of three years, to be repaid in three equal instalments.115 4.6.2 Even assuming the sector was opened to private participants, and given the high sunk costs inherent in the coal producing sector, these are factors that have historically conferred a significant competitive advantage to CIL and continue to affect its competitive position in the sector. Removing the statutory barrier to private sector participants would result in several pro competitive advantages such as increases in production, new and innovative technology being introduced, new distribution and sales techniques, etc. 4.6.3 Since coal mining involves high sunk costs and long term investments CIL with established operations enjoy incumbency benefits. These incumbency benefits could be summarised as follows116: All the available geological data are in possession with CIL; Monopolizing infrastructure (CIL has constructed railway lines through budgetary support etc.); Domain knowledge in terms of vast experience; Established market and clientele; Business Goodwill; CIL enjoys close proximity with the Ministry of Coal that guides CILs pricing and distribution decision. This is at once an advantage and a disadvantage due to the fact that it would reduces CILs competitiveness as and when the market is opened to private participants. 4.6.4 Post privatization, the extensive government regulation of CIL would reduce its competitiveness. The New Coal Distribution Policy of 2007 directly controls the amount of coal that CIL is able to sell and the persons to which the coal is to be sold, and the broad terms of agreements which govern the parties contractual relationship. CIL cannot therefore respond to realistic market conditions, given that the entire distribution is controlled by the interested Ministries. However, at the same time, while reducing the competitive position of CIL, the policy ensures a rational and coordinated distribution of coal for overall development of the Indian infrastructure and economy. In the present market context of one enterprise controlling over 80% of the market, it is undesirable that the distribution or pricing be left to market forces, where the monopolist is free to reduce output and set the
115 116
See www.coalindia.in Supra n.7, p.145.
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price at which its marginal revenue would equal its marginal cost, thereby maximizing its profits. 4.6.5 Although price deregulation is a positive step, it can be seen that since price deregulation in 2000, the price of coal has been northbound. However, the price rise for the majority of coal supplied to the power, fertilizer and defence sectors, has been kept at a reasonable level due to overarching goals of infrastructure and economic development in the country. As other players are not allowed in the sector the only benchmark for comparisons is that of import prices. Until January 1 st 2012, the prices fixed by CIL were reportedly lower than comparative import prices, and on the whole kept at reasonable levels. At the same time, the price constraints on CIL make the company uncompetitive and market insensitive.117 However, as mentioned above, in the present market context of one enterprise controlling over 80% of the market, it is undesirable that price fixation be left entirely to market forces. 4.6.6 While the sector should be opened to private players as is sought by the Coal Mines Nationalization Amendment Bill 2000, CILs competitive advantage should be sought to be maintained. The developments in the aviation and telecom sectors are prominent examples of the benefits accrued by introducing competition, but at the same time provide glaring examples of the lack of competitiveness of the public sector companies in these areas. The extreme regulation of the sector as shown above, and in addition the requirement for CIL to make public its prices, quantities, production plans, etc. would in fact place it at a competitive disadvantage to other companies if and when the sector were opened up. Solution 4.6.7 Measures must be taken to ensure that CIL does not exploit its dominant position. In addition to the same appropriate policy encouragement in the nature of concessions must be extended to the private sector, which may help reduce the rigours of competing with an established incumbent. Post privatization, the excessive regulation of CIL may be reduced.
4.7
III. Price Distortions
4.7.1 Production and transportation of coal is managed by two monopolies namely CIL and Indian Railways. Railways subsidises passenger traffic with coal freight, whereby making the delivered price of coal 2-4 times the pit-head price of coal in states such as Punjab, Haryana, Rajasthan, Gujarat, Maharashtra, Goa , Karnataka, Kerala, Tamil Nadu, Western U.P. and Delhi.118 very high. Given the same it is suggested that
117 118
Supra n.3, pgs xxiii & xxiv. In here it is listed as one of the Risk Factors. Supra n.101, p.118.
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Freight rates of railways for transport of coal need to be rationalised119. Alternative modes of movement of coal be promoted for ex. coastal shipping, river/canal movement, movement of coal slurry through pipeline etc.120. 4.7.2 Though the price of coal should be ideally determined in a competitive market, the same may not be possible given the number of suppliers, hence a process of competitive price discovery needs to be adopted 121. Till such time the demand and supply for coal comes to equilibrium there exists a need for an agency to regulate the price for major bulk consumers of coal, especially those consumers whose output prices are strictly controlled as in the power sector122. The report of the Shankar Committee observes that the decisions regarding pricing are still influenced by the Ministry of Coal and other interested ministries, nevertheless it also states that the benefits of price deregulation of prices will be evident only with the presence of more players in the coal market123.
4.8
IV. Impediments on Captive Mining
4.8.1 Under the Coal Mines (Nationalisation) Act 1973 captive consumption by companies involved in generation of power, production of iron and steel, production of cement, washing of coal, and syn gas production has been allowed. It was thought that captive mining would help enhance productivity in the short and medium term. 4.8.2 However the captive mining policy has faced significant hurdles and as not been able to achieve the goal of enhanced productivity124. The procedures for obtaining the numerous approvals and permissions from diverse departments at the State and Central level for launching a coal mine are proving to be the major factors which inhibit the companies using coal but not familiar with coal mining shying away from captive mining125. 4.8.3 One of the major issues prior to the amendment of Section 11A of the Mines and Minerals (Development and Regulation) Act, 1957 was non transparent allocation of captive coal blocks. Further CIL was the custodian of all coal blocks and would recommend the coal blocks which could be allotted126. 4.8.4 The Mines and Minerals (Development and Regulation) Act, 1957 was amended in 2010 to make a special provision for granting reconnaissance permit, prospecting license or mining lease for companies engaged in captive mining of coal or lignite , though auction and competitive bidding127. These include companies engaged in
119 120 121 122 123 124 125 126 127
Supra n.101, p.120. Supra n.101 , p.120. Supra n.101 , p.120. Supra n.104, paras 4.11-4.13, p.71. Supra n.7, p. 148. Supra n.101 , p.116. Supra n.2 , p.2 . Supra n.7, pgs 149-150. Section 11A of the Mines and Minerals (Development and Regulation) Act, 1957.
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production of iron and steel, generation of power, washing of coal obtained from a mine and such other end use that the government may by notification in the official gazette specify. The proviso to the section nevertheless makes it clear that competitive bidding shall not be applicable to an area containing coal or lignite, where such area is considered for allocation to a Government Company or Corporation for mining or such other specified end use or where such area is considered for allocation to a company or corporation that has been awarded a power project on the basis of competitive bids. 4.8.5 The specific provision in the 2010 Amendment which prohibits competitive bidding of an area considered for allocation to a Government Company or Corporation, still vests the power to pick and chose prime coal blocks with the government companies, leaving less productive blocks for competitive bidding. The Act has to be appropriately amended so as to create a level playing field for competitive bidding.
4.9
V. Bottlenecks for import of coal
4.9.1 Import of coal will certainly put competitive pressure on the domestic coal industry to be more efficient. Given the same it is important to keep the import option functioning efficiently as an essential supply option. This would ensure least cost supply of coal for power generation whilst allowing a competitive and transparent coal market to supply the needs of other consumers128. 4.9.2 However it has been observed that the cost of transporting imported coal inland negates the benefits of the landed price i.e. price at the time of import. Hence setting up of coastal power plants based on imported coal must be encouraged. Correspondingly adequate port facilities and rail linkages need to be developed as necessary infrastructure129.This will lower the dependence of domestic power utilities on domestic coal130 . Moreover, the import duty of 5 per cent as presently levied on non-coking coal may be reconsidered.
4.10
VI. Need for Regulatory Coordination a. Lack of adequate coordination between ministries and agencies administering the different statutes governing the coal sector at the Central and State Level. b. Absence of a sectoral regulator
VI.a. Lack of adequate coordination between ministries and agencies administering the different statutes governing the coal sector at the Central and State Level.
128 129 130
Supra n.2, para 5.19, p.67.(5.19) Supra n.101 , p.118. Supra n.2, para 5.17, p. 65.
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4.10.1 Achievement of production targets depends on early and timely clearance of project proposals by the Environment and Forest Agencies and mine approval agencies. Streamlining of procedures for giving a decision on the application of mining of coal in a block within a specified time by the State and Central Ministries of Environment and Forests at the State Level and Central Level is a must131. 4.10.2 A tripartite fuel supply and transport agreement between Railways, Coal, and Power Ministry could be pursued as suggested in the Distribution Policy of 2007. The railway tariff for coal should be subject to a detailed review by an independent agency, preferable headed by a High/Supreme Court Judge132. 4.10.3 Inter Ministerial coordination for development of infrastructure facilities in the nature of roads, railway lines and ports for speedy production, distribution, import and export of coal133.
b. Absence of a sectoral regulator 4.10.4 The Shankar Committee notes that at present each of the statutory agencies operates within its statutory mandate and is driven by the requirements of their department. The Committee whilst noting that it may be difficult to transfer the duties assigned to different agencies to one agency with immediate effect, recommends the setting up of a central coordinating agency and gradually strengthening it134. This may be seen as a measure preceding the establishment of a regulator. 4.10.5 Both the Shankar Committee and the Integrated Energy Policy Report of Experts recommend the establishment of a regulator in the Coal Sector. 4.10.6 The Shankar Committee opined that there was a need for a new and comprehensive governance structure for the Coal Sector including a regulatory mechanism to attend to all issues relevant for development of coal resources, regulation of coal price, whenever necessary, and nurturing level playing field between the influential large public sector coal companies and the emerging small coal companies in the State public sector and the captive mining sector.135 That the said authority could be known by the nomenclature Coal Governance and Regulatory Authority (CGRA) and would derive its powers from the existing statutes any new Acts which may be enacted. 4.10.7 That the Shankar Committee opined that the proposed Coal Governance and Regulatory Authority should be advised by an Advisory Board, known by the name National Coal Council of India in which all the interested players are duly
131 132 133 134 135
Supra n.104, para1.5 at p. 5 and para 1.10, p.8. Supra n.2. Supra n.104. Supra n.2, para 4.8, p.70. Supra n.2, para 4.3, p.67.
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represented136. The two new agencies would facilitate growth of coal sector and make governance of coal sector participatory and all inclusive. The Shankar Committee observes that merely having a regulator to regulate coal prices would not be able to solve the problem137. 4.10.8 Similarly the Integrated Energy Policy Report whilst recommending the establishment of a regulator in the Coal Sector, suggests the probable functions of such regulatory body 138: As an interim measure approve coal price revisions, Ensure supply of coal to power sector under commercially driven long term FSTA Facilitate the development of formulae/indices for resetting coal prices under long term fuel supply agreements, Monitor the functioning of the proposed e-auctions, ensure that the price discovery through e-auctions is free of distortions, Regulate trading margins, Develop a mechanism for adequate quantities of coal imports under long term contracts to bridge the gap between supply and demand, Create an environment for competitive coal market to operate, and Regulator to ensure that mines are planned, designed and developed in a scientific manner, giving due importance to conservation of coal.
136 137 138
Supra n.104. Supra n.104, para. 4.30, p.78. Supra n.101, p.121.
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CHAPTER V: CONCLUSION AND AGENDA FOR COMPETITION POLICY ADVOCACY
Conclusions 5.1 As observed in the analysis in the preceding chapter, inadequate data, lack of access to available data on extractable coal reserves, prohibition on private sector participation in coal exploration, long delays in allotment of surface rights and mining clearances, environmental considerations delaying grant of prospecting permits and mining leases and incumbency benefits enjoyed by CIL are some of the significant barriers to entry into the coal exploration, reconnaissance and mining markets. The primary objective of nationalisation was to increase capital investment in the coal sector, given the rising demand for coal and the need for enhanced productivity. Nationalisation was also undertaken to prevent unscientific mining, bring about better working conditions of workers especially better health, housing and education standards for workers. Nevertheless it so appears that the objective behind nationalisation has not been fully achieved given the continued shortage of coking and non-coking coal and deteriorating quality of thermal coal,139 though mine safety issues have been addressed. Even the mode of exploitation of resources has been inefficient resulting in sterilising significant portions of existing coal reserves140. The same is due to the fact that in open cast mines the coal is mined only to the depth of 150 meters. At the current production levels the known extractable reserves may be depleted in the next 45 years, moreover a large proportion of coal reserves may not be extractable141. There has been a deterioration of the quality of domestic thermal coal due to increased reliance on cost effective open cast mining operations142. The blanket ban on Coal Mining (but for captive mining), inadequate transport infrastructure and high coal freight rates set by yet another public sector monopoly i.e. railways, has serious implications for key the input for energy production. This would in turn reflect on the competitiveness of the industry and the standard of living of the citizens. CIL & SCCL have been slow in adopting new technologies aimed at efficient exploitation and conservation of coal resources, for example underground mining as opposed to the open cast mining or environmentally friendly clean coal technologies. Over a period of time the rate of growth of the power sector
5.2
5.3
5.4
5.5
139 140 141 142
Supra n.7, p.139. Supra n.101, p.117. Supra n.101, p.117. Supra n.101, p.116.
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has surpassed the growth in productivity of the public sector giants, leading to reliance on imports and a restricted captive mining sector so as to bridge the supply deficit.
Agenda for Competition Policy Advocacy 5.7 Some solutions to the specific anti-competitive provisions identified in course of the statutory and regulatory review have been discussed in the preceding chapter. One bitter truth about regulatory reform in the Coal Sector has been the non-passing of amendments aimed at liberalising the sector for private player participation owing to or resistance from the workforce in the public sector undertakings, entrenched interests and lack of political will. Hence any advocacy strategy must concentrate on non-legislative solutions as well. The same could be in the nature of streamlining of mining license processes, greater centre state coordination, enhancing infrastructural facilities for import and transport of coal, encouraging coal based coastal thermal power plants, bringing in clean coal technologies under the realm of captive consumption etc. Discussed below are both legislative and non-legislative suggestions which could be incorporated in to any competition advocacy agenda aimed at enhancing competition and productivity in the coal sector No 1. Conclusions (AntiCompetitive Section ) Prohibition on private sector participation in coal reconnaissance, prospecting or mining. Alternatives/ Steps for Competition Advocacy Pending the passing of the Coal Mines (Nationalisation) Amendment Bill, 2000, other avenues permitted under existing legislation need to be resorted to so as to increase the number of players in the sector. The same include
Encourage mining by State Government public sector companies; Increase captive user industries; Captive users must be allowed to sell incidental coal surpluses; Group captive mines must be allowed for small end users; Those allotted captive blocks must work the block within a stipulated period of time failing which the allotment either stands cancelled or a penalty is imposed.
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2.
Inadequate data and inaccessibility of data on extractable coal reserves for private players.
All the data related to coal retained by CMPDIL should be kept in the public domain and only such data which is relevant for the work of CIL must be retained. In those areas not covered by Proven Reserves with Geological Reports the private sector must be invited participate in exploration and mine development at their risk partly shared with the government on the lines of New Exploration Licensing Policy (NELP) followed in the oil sector. At present detailed coal exploration is done exclusively by CMPDIL which is a subsidiary of CIL. CMPDIL must be made an autonomous organisation.
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3.
Allocation of Coal Blocks & Allotment of surface rights and mining clearances.
Section 11A of the Mines and Minerals Act, mirrors the captive mining related provision of the Coal Mines (Nationalisation) Act, 1973 [Sec 3.(a)(iii)]. It is opined that the same would have to be amended after the proposed Amendment Bill of 2000 is given effect to by the Union Parliament. The amendment to introduce auctioning of coal blocks to private companies for captive mining is a salutary step as it seeks to grant coal blocks impartially and transparently on the basis of auctions. Further, participating firms are likely to develop the block won in the auction as soon as possible and not delay progress has been the case with the many coal blocks allocated to the private sector. However, the provision may be amended to include public sector companies in the bidding process, i.e. remove the power of the Government to reserve coal blocks for allocation to CIL and its subsidiaries. The procompetitive implementation of the provision would also depend of the scheme of auction, which is presently being formulated by the Ministry. Section 11 of the Coal-Bearing Areas (Acquisition and Development) Act, 1957, allows the Central Government to vest the land acquired in a government company. This provision could be appropriately amended so that a similar treatment is extended to private players as well.
4.
Changing environmental policies, and considerations delaying grant of prospecting permits and mining leases.
A Group of Ministers is said to be working on resolution of these issues while striking an appropriate balance between environment protection and energy security. A clear policy needs to be adopted with procedural rules that incorporate strict time lines for clearances.
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5.
Incumbency enjoyed by CIL
benefits
CIL ought not to exploit its dominant position. In addition to the same appropriate policy encouragement in the nature of concessions may be extended to the private sector, which may help reduce the rigours of competing with an established incumbent.
6.
Non Working of Coal Blocks and Mining Licences.
Legal measures should be evolved to cancel the licenses issued earlier if the allottee has not taken adequate steps to bring the allotted mines to production or in setting up end use units. CILs pricing decisions are influenced by Government policies. Eg. Differential pricing for defence, fertilizers and power. Freight rates of railways for transport of coal need to be rationalised. Alternative modes of movement of coal be promoted for ex. coastal shipping, river/canal movement, movement of coal slurry through pipeline etc.
7.
Price Distortions
9.
Impediments on Captive Mining
Section 11A The Mines and Minerals (Development and Regulation) Act, 1957 which prohibits competitive bidding of an area considered for allocation to a Government Company or Corporation, vests the power to pick and chose prime coal blocks with the government companies, leaving less productive blocks for competitive bidding. The Act has to be appropriately amended so as to create a level playing field for competitive bidding.
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10.
Setting up of coastal power plants based on imported coal must be encouraged through appropriate policy initiatives. Correspondingly adequate port facilities and rail linkages need to be developed as necessary infrastructure.
11.
Need for Coordination
Regulatory
There is a need for a new and comprehensive governance structure for the coal sector including a regulatory authority.
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Select Bibliography

39th Report of the Standing Committee on Coal and Steel, Ministry of Mines, on the Mines and Minerals (development and Regulation) Bill 2008, February 2009 CMPDI Annual Report 2010-11 Coal India Annual Report 2010-11 Coal India Final Prospectus, October 26, 2010 Draft Approach Paper to the 12th Five Year Plan (2012 2017) prepared by the Planning Commission of India Draft National Competition Policy 2011, Ministry of Corporate Affairs European Commission Staff Working Document, Aftermath of the expiry of Regulation 1407/2002 on State aid to the coal industry - Impact Assessment, 2009 Final Report on Competition in Indias Energy Sector, The Energy and Resources Institute (TERI), New Delhi, 2007 Integrated Energy Policy Report of Expert Committee submitted to the Planning Commission, August 2006 Mid Term Appraisal of the 11th Five Year Plan by the Planning Commission, July 2010 Ministry of Coal Annual Report 2010-2011 OECD Competition Assessment Toolkit, Volumes 1 & 2, 2011 Provisional Coal Statistics 2009-2010, Coal Controllers Organization, Kolkata Report of the Expert Committee on Road Map for Coal Sector Reforms Part I, December 2005 Report of the Expert Committee on Road Map for Coal Sector Reforms Part I, October 2007 Report of the Inter-Ministerial Task Force for Rationalization of Existing Sources of Coal Supply, September 2011 Report of the Standing Committee on Energy on the Coal Mines (Nationalization) Amendment Bill 2000, August 2001 Report of the Working Group on Competition Policy, Planning Commission, February 2007 Report of the Working Group on Power for the Eleventh Plan, Vol. II, Ministry of Power, February 2007 Report of the Working Group on Steel Industry for the 12th Five Year Plan, Ministry of Steel, November 2011 Summary of the Major Initiatives on Environment, Forests, and Wildlife, in 2009-2010, Ministry of Environment and Forests, June 2010
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Annexure A
Legislation that does not and is not likely to adversely affect competition
(a) Mines Act 1952 1.1 Preamble: The preamble to the act states that it is a legislation to amend and consolidate the law relating to the regulation of labour and safety in mines . Main Provisions: The term mine is defined as any excavation where any operation for the purpose of searching for or obtaining minerals, which includes coal. The Act deals with the appointment, duties and powers of, inspectors and qualified medical practitioners143; the establishment of a committee to consider proposals for making rules and regulations, enquire into accidents, and hear and decide appeals and objections under the Act and Rules144; responsibilities of owners, agents and managers of mines145, the provision of drinking water, latrines, first aid kits, etc. 146; work hours, night shifts, overtime, supervision, women workers, maintenance of registers etc.147; and leave with wages148. Power is conferred on the central government to make rules and regulations consistent with the objectives of the Act149, and penalties are provided for violations of the provisions of the Act, Rules or Regulations framed thereunder150. Mines Rules 1955: As stated above, in pursuance of the power conferred on the Central Government, the Mines Rules were issued in 1955 which provide further detailed rules regarding the safety standards, qualifications, health and sanitation, and prescribes the forms in which the various registers, returns and notices, are to be maintained and/or filed. Coal Mines Regulation 1957: Issued in 1957 by virtue of the power conferred on the central government under Section 57 of the Act, the said regulations prescribes the specific technical standards, qualifications, safety measures etc. required in coal mines. The regulations provide for certification by a board of mining examinations, qualifications, certification, and duties of managers, surveryors, overmans, sirdars, winding enginemen, shot-firers, gas-testers, lamp checkers, and other officials/workmen, in various parts of a mine and for the carrying out of specific functions etc. The regulations also prescribe the forms in which the various registers, returns and notices, are to be maintained and/or filed. Observations: As can be seen from the above review, the legislation pertains to
1.2
1.3
1.4
1.5
143 144
145 146 147 148 149 150
Sections 5-11 of the Mines Act 1952 Sections 12-15 along with sections 22-27 of the Mines Act 1952 dealing with notice of accidents, disease, investigations etc. Sections 16-18 of the Mines Act 1952 Sections 19-21 of the Mines Act 1952 Sections 28 to 48 of the Mines Act 1952 Sections 49-56 of the Mines Act 1952 Sections 57-62 of the Mines Act 1952 Sections 63-81 Mines Act 1952
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regulating the labour and safety standards in mines, including coal mines. Whereas these standards may increase operational costs for producers, they are an absolute necessity in order to protect the workers in a mine. Moreover, the requirements are applicable uniformly to all coal mines and therefore do not produce any distorting effect between competitors.
(b) Coal India (Regulation of Transfers and Validation) Act 2000 2.1 Preamble: The preamble to the act states that it is a legislation to empower the Central Government to direct transfer of the land, or of rights in or over land, or of the right, title and interest in relation to a coal mine, coking coal mine, or coke oven plant, vested in Coal India Limited, or in a subsidiary company to any subsidiary company of Coal India Limited or to any other subsidiary company and to validate certain transfers of such lands or rights. Main Provisions: By virtue of this enactment, a subsidiary company of Coal India Limited which was operating or in control of any coal mine that had been vested in Coal India Ltd. was be deemed to have been vested with the land, or rights, title, interest in relation to such coal mine at all times.151 Moreover the Government of India could issue a direction vesting the rights in respect of any coal mine vested to Coal India Ltd. to any subsidiary of Coal India Ltd. The subsidiary would automatically be deemed to the lessee of such mine under the Mineral Concession Rules 1960 for the maximum available period.152 Observations: The Act primarily seeks to statutorily validate mines vested in Coal India Ltd. as being vested in its subsidiaries where they were already in control of and operating a coal mine. As the Act merely regularizes transfers to avoid technical difficulties it does not appear to have any competition concerns.
2.2
2.3
(c) Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 , along with the Coal Mines Provident Fund Scheme 1948, the Coal Mines Deposit Linked Insurance Scheme, 1976, and the Coal Mines Pension Scheme 1998 3.1 Preamble: The preamble to the act states that it is a legislation to make provision for the framing of a Provident Fund Scheme, a Family Pension Scheme, a DepositLinked Insurance Scheme, and a Bonus Scheme for persons employed in coal mines. Main Provisions: The Central Government is empowered by virtue of the provisions of the Act153 to frame appropriate provident fund, pension, insurance, and bonus schemes for any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with a coal mine and who gets his wages directly or
3.2
151 152 153
Section 4 of the Coal India (Regulation of Transfers and Validation) Act 2000 Section 3 of the Coal India (Regulation of Transfers and Validation) Act 2000 Sections 3, 3E, 3G, and 5 respectively of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
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indirectly from the employer or contractor154. In exercise of these powers the Central Government has framed the aforementioned Schemes for employees. Under the Provident Fund Scheme 1948, the contribution is 12 per cent of total emoluments comprising basic pay and other admissible allowances as employees share and an additional 12 per cent contribution as employers share. 3.3 Observations: The Act and Schemes famed thereunder relate to labour welfare on the event of superannuation, retirement, resignation, or death. The provisions of the Act are uniformly applicable to all persons owning and operating a coal mine and therefore cannot be said to have an adverse effect on competition.
(d) The Coal Mines (Conservation and Development) Act 1974 4.1 Preamble: This Act was enacted so as to provide for conservation of coal and development of coal mines. The Act states that it is in public interest that the Central Government take under its control the regulation and development of coal mines to the extent provided for in the Act155. Main Provisions: It vests in the Central Government the power to take any measure for the purpose of conservation of coal and for the development of coal mines 156. The Central Government may require the owner, agent or manager of a coal mine to take such measures it may think necessary for purpose of conservation of coal or for development of coal mines , including157 stowing for safety in any coal mine, prevention of any factor which may adversely affect the conservation of coal or development of a coal mine and washing of coal with a view to reducing the ash content of coal In the event of the Central Government taking any steps for undertaking the aforementioned activity with reference to any coal mine the Government can recover the costs of the same as arrears of land revenue158. The Act vests on the Central Government the power to levy and collect Excise Duties on all coal raised and despatched and all coke manufactured and dispatched from the collieries in India159. The Central Government is also empowered to impose customs duty on imported coal during the period excise duty is levied at rates equivalent to the excise duty imposed160. The proceeds so collected are to be disbursed to the owners/agents/managers of coal mines to undertake conservation of coal and development of coal mines , grant stowing materials and other assistance in stowing operations, research in coal conservation and development and any other aspect including transportation, distribution and utilisation of coal161.
4.2
4.3
154
155 156 157 158 159 160 161
As covered by the definition of employee in Section 2(d) of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 Section 2 of The Coal Mines (Conservation and Development ) Act 1974 Section 4 (1) of the Coal Mines (Conservation and Development) Act 1974. Section 4 (1) of the Coal Mines (Conservation and Development) Act 1974. Section 4 (1) of the Coal Mines (Conservation and Development) Act 1974. Section 6 of The Coal Mines (Conservation and Development) Act 1974. Section 7 of The Coal Mines (Conservation and Development) Act 1974. Section 9 of The Coal Mines (Conservation and Development) Act 1974.
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4.4
Correspondingly it also imposes the duty on the owner of a coal mine to ensure the conservation of coal and development of a coal mine162. The Act also requires the owner to undertake stowing and other operations, undertake research, develop coal mines in a scientific manner etc., in furtherance of conservation or development of a coal mine, as per the objects of the Act163.
4.4 Observations: This law is aimed at promoting conservation of coal. It is uniform it its application and the provisions are not prima facie distortive of competition.
(e) Offshore Areas Mineral (Development and Regulation) Act 2002 & the Offshore Areas Mineral Concession Rules 2006 5.1 Preamble: The primary purpose of the legislation is to provide for development and regulation of mineral resources in the territorial waters, continental shelf, exclusive economic zone and other maritime zones of India and related matters. Main Provisions: As the title of the Act suggest the provisions relate to reconnaissance, exploration, and mining of minerals (including coal) in offshore areas, i.e. territorial waters, continental shelf, exclusive economic zones and other maritime zones as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act 1976. Similar to the Mines and Minerals Act 1957, persons are required to obtain licenses for exploration and mining of minerals form the appropriate authority. The lease period of mining is also of the same period of 30 years (maximum) initially and 20 year renewal period (maximum), and specified the rates of royalty and fixed rent payable. Similarly, the Offshore Areas Mineral Concession Rules 2006 provide for the procedure for, forms or, and conditions applicable, in the case of exploration and production leases. As per publicly available information, whereas various minerals have been mapped off Indias coastal lines, coal has not yet been identified. Moreover, whereas Australia and China have undertaken coal mining and production offshore, there appears to be no proposal to explore or mine coal off Indias shore at this time. Observations: The Act mandates that parties obtain exploration licences and enter into leases with the Government for mining of minerals. Technically though coal is covered under the provisions of the Act, it is unlikely that parties would undertake coal exploration and production offshore given the huge reserves yet to be mined on land. Moreover, the ban on private parties mining coal as imposed under the Coal Mines Nationalization Act of 1973, continues to apply even offshore.
5.2
5.3
5.4
(f) Foreign Investment in Coal

162 163
Section 5 (1) of The Coal Mines (Conservation and Development) Act 1974. Section 5 (2) of The Coal Mines (Conservation and Development) Act 1974.
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6.1
Foreign investment in Indian securities is governed by the provisions of the FEMA read with the applicable FEMA Regulations. The DIPP has issued Circular 1 of 2011 (FDI Circular) which consolidates the policy framework on FDI, with effect from April 1, 2011. Foreign investment is permitted (except in the prohibited sectors) in Indian companies either through the automatic route or the approval route, where approval from the Government of India or RBI is required, depending upon the sector in which foreign investment is sought to be made. Under the automatic route, the foreign investor or the Indian company does not require any approval from the RBI or Government of India for investments. 100% FDI is allowed under the automatic route in coal and lignite mining for captive consumption by power projects, iron and steel and cement units and other eligible activities permitted under and subject to the provisions of the Coal Nationalization Act. 100% FDI is also allowed in setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing. Under the approval route, prior approval of the Government of India through FIPB is required. FDI for the items or activities that cannot be brought in under the automatic route may be brought in through the approval route. Observations: As can be seen, the foreign investment policy in the coal sector is fully permitted and is therefore pro-competitive. The real restrictions are placed by the Coal Mines (Nationalization) Act 1973, to which any foreign investments will be subject.
6.2
6.3
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R E P O R T O N C O M P E T I T I V E N E S S I N T H E C O A L S EC TO R

02nd February, 2012

4.4 4.5 4.6 4.7 4.8 4.9 4.10

Adithya Krishna Chintapanti

The Energy and Resources Institute Terms of Reference

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Sectoral Issue Ministry of Coal

Sectoral Issue Ministry of Coal

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

Bottlenecks for import of coal.

Setting up of coastal power plants of based on imported coal must be

Text of the Provision (section/clause) Or Sectoral Practice / Feature

10. Sectoral Issue Ministry of Coal

Need for Regulatory Coordination

11. Environment and Policies Ministry Environment Forests

Act / Rule / Regulation / Policy / Practice / Issue & Concerned Ministry

Text of the Provision (section/clause) Or Sectoral Practice / Feature

CHAPTER II : COAL SECTOR OVERVIEW

Types & Uses of coal

Size of the Indian coal market

2.3.1 Coal Reserves

as on 01.04.2008 Proved Indicated Inferred Total 101829 124216 38490 264535

15.92 23.47 39.39

Annual Report 2010-2011, Ministry of 09.10.2011. Ibid.

http://coal.nic.in/annrep1011.pdf , Last accessed on

380.13 38.47 20.80 22.89 88.82 542.86 582.25

405.00 40.00 25.98 28.80 85.00 584.78 624.78

473.00 47.06 33.35 28.96 62.43 644.74 713.24

CIL SCCL Others

415.88 49.37 49.25

Supra n.3. Supra n.3. Supra n.3. Supra n.12.

597.98# This figure

CHAPTER III : REGULATORY FRAMEWORK

(l) Foreign Direct Investment Policy; (m) Import Policy.

102 103 104

Relevant Entries in the Competition Checklist

Bottlenecks for import of coal.

Need for Coordination

CHAPTER IV: ANALYSIS & RECOMMENDATIONS

I.a. Inadequate data on extractable coal reserves

I.b. Prohibition on private sector participation in Coal reconnaissance, prospecting or mining.

I.d. Changing Environmental policies The Issue

See www.coalindia.in Supra n.7, p.145.

III. Price Distortions

IV. Impediments on Captive Mining

V. Bottlenecks for import of coal